The Hindu Business Line : Pension reforms left at nascent stage

THE financial sector could witness major changes once a new formation takes charge at the Centre after the forthcoming general elections. The big one that is waiting to unfold is the pension reform that is expected to give rise to a sector that is billed to be the largest segment of the financial market in the years to come.

With the announcement of poll dates, the present NDA Government would be moving out leaving a vast unfinished agenda for the next Government to take up on the pension front. Reform in the sector is at present in its nascent stages with only an interim Pension Fund Regulatory and Development Authority (PFRDA) having been set up.

The big pension push is expected as one of the priority items of the new Government with the selection of the Central Record-keeping Agency and setting out the parameters for licensing of Pension Fund Managers (PFM) being on top of the immediate agenda for the sector.

The interim PFRDA, along with the Government, has till now worked on the basic framework for the reforms which would be based on defined contribution system. Under this, the PFRDA would be initially granting licences to nine PFMs one of whom would be from the public sector.

The PFMs would, in turn, offer schemes to the general public and to the new Central Government recruits from a limited bouquet of three different products that would be differentiated on the basis of the extent of risk associated on each on account of the different levels of equity investment permitted under each scheme.

On the banking front, the Government has left the politically-sensitive Bill on reduction of the Centre's holding in public sector banks to 33 per cent for the successors to tackle. However, even for the new Government, it would require a strong will and a big majority to push ahead with this one. The proposal for freeing the voting rights in private sector banks to make it proportionate to the holding is also pending before Parliament.

The banking sector also hopes that the next few years could also see a spate of consolidation, with this time around the focus being on mergers between healthy public sector banks. This has been one of the recommendations of the Narasimham Committee that had just started being talked about and is likely to gain momentum.

While the insurance sector has stabilised after three years of letting in private competition, the issue of a hike in the cap on foreign direct investment (FDI) limit in insurance companies from the present 26 per cent is still pending. The Government had been processing the N K Singh Committee suggestion that the limit be raised to 49 per cent during recent months.

Beside, the insurance sector could have a whole new legislative framework under the new Government which is expected to commence work on the clubbing of the Insurance Act, 1938, and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.