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Tuesday, Oct 26, 2004

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Legislation likely to be passed in winter session — Pvt pension funds may launch new products by end-2005

Veena Venugopal

Mumbai , Oct. 25

PRIVATE pension fund mangers hope to launch their products in the country by December 2005. This is based on indications that the legislation for setting up the Pension Fund Regulatory and Development Authority (PFRDA) would be passed in the winter session of Parliament.

"The prospect is that the PFRDA legislation would go through in winter and by August 2005, the regulations governing the industry would be entirely in place,'' said Mr Norman Sorensen, President, Principal International Inc. In terms of indicative time-lines, the Government should be in a position to start its efforts to educate and make the pension fund consumers more aware by December 2005.

"We expect that there would be a number of pension fund managers already in operation by then,'' said Mr Sorensenn.

Pension fund providers are happy that the Government has decided to de-link the PFRDA from the Insurance Regulatory and Development Authority earlier this year. It is also expected that the Government would announce three types of funds — conservative, balanced and dynamic. While conservative would invest only in Government bonds and other secure products, balanced would have some amount of equity exposure. Dynamic pension fund products would have the maximum exposure to equity at perhaps, around 40 per cent.

"Typically our experience with pension fund reforms around the world is that when Governments' reform, they tend to be very conservative. We do not expect that in India the Government would offer only one option,'' added Mr Sorensen. There has been speculation that the Government would initially allow pension fund investments in index funds only. In the initial years, pension fund players anticipate consumers to opt for conservative products. Over 70 per cent of consumers will end up choosing "pure bond'' options in the first two to three years. Over time, as markets mature customers would choose a more dynamic scheme with higher yields. Younger families, especially, would realise that their long-term requirement would be better met by equity exposure, according to experts in the industry.

This pattern has been evident in other markets also. Pension fund investments in Chile, for the first seven years, were almost entirely in non-equity products. Equity investments started picking up in the next seven to eight years and the Chilean market is currently composed of 37 per cent investment of pension funds in equities.

"Even in the US, which has a strong equity culture, 60 per cent investments were only in bonds initially. Today, that ratio has turned and 65 per cent investments are in equity linked products,'' Mr Sorensen pointed out.

Pension fund players anticipate that the Government would launch a mega media exercise to make customers aware of the risks and returns associated with pension fund investments. "There would be private-public participation in spreading this message. We expect players like ourselves to have a significant role in helping the Government in this exercise,'' said Mr. Stuart J. Brahs, Vice President-Federal Government Relations, Principal Financial Group.

Pension fund players are awaiting further information before making their product proposals for India. Clarifications are being sought on whether the reforms would be employer driven or employee driven, extension of coverage to the unorganised sector, etc.

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