The Hindu Business Line : `Let pension funds be exposed to equity '

Invest in equity or perish. If you thought that was too hard-hitting, tune in to Mr U.K. Sinha, Chief of India's largest fund management company UTI MF, who was found the other day to grieve over the fact that superannuation funds have little to do with equity.

Mr Sinha, who was addressing a meet organised by a leading chamber of commerce, drove his point home quite effectively - all of it in the presence of eminent guests. For those who could not attend, the list of guests included the Minister of Labour & Employment, the Central Provident Fund Commissioner and the head of PF trust at Belur Math, Ramkrishna Mission.

The message he delivered is simple enough: Allocations to equity are essential insofar as PFs are concerned and should be allowed by the authorities, subject to checks and balances.

As Mr Sinha puts it, pension issues today affect most developed nations. A number of large corporations have suffered because of them in recent times. In certain cases, promises have not been fulfilled, with some advising employees to work longer or asking them to accept lower returns or even to contribute more.

In the global arena, a few trends stick out. One, both defined contribution (DC) and defined benefit (DB) systems are in place. Two, there are funding gaps in certain DB systems. Three, smart players have effected diversification in pension assets. Four, some have gone in for cross-border investments.

As for developing countries like India, issues such as pensions are getting related to a large number of social aspects - break-up of joint families, old-age insecurity, higher cost of living, more longevity and the like. An Indian employee, in fact, may live for as many as 20 years after he stops working.

Inadequate coverage

The overall coverage by various pension arrangements, however, is quite inadequate in this country. And so are the returns that are being generated these days. This, therefore, is really the time to take a serious look at equity investments, it is argued. Incidentally, a number of overseas pension funds have been diversifying their investment profiles (to include more equity).

"We (in India) are not changing with time... a good portion of FII money flowing into India is pension money, which is coming into our economy with the hope of tapping opportunities arising here. However, Indian workers are being denied that opportunity," the UTI MF boss notes, indicating that the current legislation imposes severe restrictions for Indian workers on this front.

In contrast, a number of countries, including the US, Japan and the Netherlands, allow substantial investments by pension funds in the stock market. And in a limited way, alternative investments are allowed as well.

The fund house also refers to the strong show put up in recent years by Indian stocks in this context. The Sensex, after all, has turned in handsome returns (over a period of time), complete with a CAGR that has not failed to impress most observers. In these circumstances, even a small allocation to equity could have helped our superannuation funds.

We would like to end the column with a home-spun solution, courtesy Mr Sinha. The PF organisation (which is currently a regulator as well as a fund manager) needs to be re-worked - the time has come to separate fund management from regulation. The challenge is in harnessing savings, and not in handling poor demand.

Feedback may be sent to nilanjan@thehindu.co.in

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