Today's Paper OPINION

Tread with caution

The passage of the long-pending Pension Fund Regulatory and Development Authority (PFRDA) Bill confers several
benefits to the organised pension sector. In a country with very few social security schemes for senior citizens, there has
been a pressing need to introduce new pension schemes as well as expand the coverage of existing ones. An empowered
PFRDA it did not have a statutory status when it was set up in August 2003 through an executive order can more
effectively regulate the nascent industry, protect its subscribers, attract investors including from abroad, improve data
collection and dissemination through the central record keeping agency (CRA) and, in general, help grow the industry.
The National Pension System (NPS), which was rolled out in 2004 by the newly set up PFRDA, has emerged as the only
significant pension scheme outside those operated by the Employees Provident Fund Organisation (EPFO). Despite a
record of reasonable success, it is in for a major overhaul. Beginning 2004, the NPS was first thrown open to new
government employees. Many State governments have since come on board, clearly motivated by the fact that the NPS
operates on the basis of a defined contribution by its members as opposed to defined benefits under the EPFO. For
cash strapped governments, the fiscal benefits of migrating to the new scheme are huge. The NPS covers employees of
public sector undertakings, private firms and even those in the unorganised sector.
With a large captive clientele in the region of 50 lakh subscribers and a corpus of Rs.35,000 crore that doubles itself
every year, the NPS should have made a more significant impact on the pension and related sectors than it has. Part of
the reason might lie in its near monopoly status which did not encourage innovation and marketing. The PFRDA, now
with a legal status, is in a much better position to encourage new schemes tailored to suit specific requirements. The
new legislation will facilitate foreign direct investment in the pension sector. The extent of such investment will be
aligned to those obtaining in the insurance sector. Even before the new legislation, a few leading global pension funds
had set up shop in India and in a regulated environment their numbers will increase. However, very different from
insurance, the pension sector does not require large investments from abroad. More than a word of caution is
necessary in propagating market based schemes involving equity investment. It is prudent to peg the limit on equity
investment to the existing not more than 50% of the corpus of any fund. Where allowed, prospective subscribers must
be warned of the risks through a comprehensive education programme.