Opinion The guaranteed return of the pension bill

Since they potentially affect the futures of millions of Indians,the pension sector and the PFRDA Bill have come under great scrutiny. A parliamentary committee chaired by Yashwant Sinha was set up to study the sector and the bill and provide recommendations for its improvement. That process is now complete,with many of the recommendations not being taken on board in the framing of the new bill — which has created a lot of controversy,notably in the context of foreign direct investment (FDI) in the sector.

What is important about FDI?

This is a sensitive issue,since if foreign investment is allowed,foreign corporations will be responsible for the futures of a huge number of Indians. The Yashwant Sinha committee recommended a cap on FDI to be put in the PFRDA Bill itself,but this was ignored. “The government is of the view that the FDI cap in the pension should be at 26 per cent,on par with the insurance sector… However,it would like to retain the flexibility of changing the cap,and that is why it has not been kept as part of the bill,” said a government official after the cabinet meeting. That’s basically bureaucrat-speak for “every time we want to change the FDI cap,we’re going to have to go back to Parliament,and we don’t want that”. That,coupled with the fact that the government has found it extremely tough going,in trying to change the FDI cap in the insurance sector,means that it’s probably a good move that the FDI cap hasn’t been set in stone.

What were the other changes to the bill?

The PFRDA Bill provides for the establishment of a statutory authority (as opposed to the interim one in existence now) to undertake promotional,developmental and regulatory functions. The interim fund,called the PFRDA,currently is in charge of administering the New Pension Scheme (NPS),which manages the retirement savings of government employees who joined service after January 2004. The scheme’s ambit was subsequently expanded to include state government employees and private individuals. As of now,the scheme has a corpus of Rs 10,000 crore and over 24 lakh subscribers,and it is assumed that after the statutory body takes over,this number will increase.

Also,the government has rejected the Yashwant Sinha committee’s recommendation that a provision for assured returns also be inserted into the bill. Based on a small sample,which may not be representative,the 2010 shortfall in the Employees Pension Scheme was Rs 50,000,and so the last thing pension firms need is to be forced to give assured returns.

If the new bill is so sound,why is it being criticised by some?

The CPM,that friend of the people,has taken issue with the fact that the new bill doesn’t have a provision for assured returns. In a statement,it said,“The pension bill will deprive lakhs of government employees both at the Centre and state level of their right to get an assured rate of pension at the time of retirement which they have been enjoying.” This is quite possibly a limited (and cynical) view because the absence of a provision for assured returns doesn’t mean that the pension companies will now rook subscribers just because they can. While the feeling that pensioners’ money should be kept safe at all cost is a valid one,the interim regulator has some safeguards of its own. For example,some pension funds are forced to only invest in ultra-safe securities. Yashwant Sinha,quite naturally,is opposed to the passing of the bill since most,if not all,of the important recommendations his committee made have been rejected.

There is still much to be done,such as in the case of agent commissions. At present,they have no incentives to sell NPS-type pension products,but have a lot of incentive to sell insurance. This must be addressed,as must the fact that while the pension regulator covers all pension firms,it has no authority over insurance companies selling pension schemes — a major loophole.

sharad.raghavan@expressindia.com