The Hindu Business Line : Pension funds

This is with reference to "Contributory pension system: Approach with caution" (Business Line, December 23). One of the main points made in the article is the need to tread very cautiously with regard to investing pension funds in the equity market. One feels that three points need to be kept in mind for pension funds that invest in equities

Capital preservation: This needs to be the fundamental basis on which the fund managers work. The asset allocation towards equity must be a cap and the fund manager must book profits and shift asset allocation in favour of debt/cash if he feels a particular investment objective has been met.

This is clearly against the grain of current fund manager thinking who see "staying invested" as the mantra for success. Monitoring of fund managers should also be along these lines. If this can be implemented and monitored properly one sees no problems in pension funds taking a limited exposure to equities.

Pension withdrawal: The current process of withdrawing a lumpsum and then buying an annuity with the rest of the amount needs to be exercisable at the discretion of the pensioner over a period of time (say, within 5 years from the date of maturity) and not at a particular point in time. This is because the market may be in a bad patch (which may take up to three years to recover), and investments allocated to equity would be better off if they stay invested.

Taxation: In the current regime the investments into and earnings of the pension funds are tax-exempt while the withdrawals are taxed. In the context of equity-based pension funds, the Centre must provide tax relief on pension withdrawals due to the fact that returns generated from equities have already been taxed substantially by both direct and indirect taxes. This would be like the double/triple taxation found in mutual funds, which was later addressed to some extent by making dividends tax-free in the hands of the investor.

Finally, stability in government policy and a restriction on assured return schemes are critical to ensuring that pensioners get a fair deal.

Shreepad Shukla

Bangalore

Letters to the editor and contributions can be sent by e-mail to: bleditor@thehindu.co.in

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