The Hindu Business Line : Equity in pensions

Permitting a slice of pension funds to seek better returns from equities imposes a limit on government access to pension money as a resource for deficit financing.

Slowly but surely, India’s pension system is moving into the modern age. In August last year, private provident fund and superannuation trusts were permitted to invest a larger amount of their corpus in equity; a year later, the Finance Ministry introduced a Bill in Parliament to amend the Indian Trusts Act of 1882 to empower the Government to make the changes. The most important of these would do away with the archaic, case-to-case approval of the kind of security in which trust money could be parked. Now, funds from the Government’s New Pension Scheme, introduced some years ago, will also be permitted to invest 15 per cent of the money in equities, instead of just five per cent. Managing the corpus of Rs 3,000 crore in the NPS are public sector financial institutions such as SBI, LIC and UTI; for them, the break from the past offers greater options for expansion.

Welcome as the changes are, they still leave the vast pool of pension funds untapped for any constructive economic purpose. Even as critical sectors such as infrastructure are in dire need of resources, pension money has been available on tap, as it were, only for the government. For more than 60 years, pension funds, both private and official, have been a lucrative source for the government’s public spending. Permitting a slice of those funds to seek better returns from rated equities rather than official bonds, in effect, imposes a limit on the government’s access to pension money; that limit has to be steadily increased so that pensions can be more fruitfully deployed in debt or equity instead of serving as a captive resource for deficit financing, with its inflationary potential. In India, pension reforms have been protracted since the late 1990s, partly on account of stiff opposition to any change in investment rules but also because India has a relatively young population and, traditionally, the aged have been provided for within the ethos of the joint family. That is changing; life expectancy has grown dramatically as has the nuclear family; estimates suggest the aged population will total 350 million in another 40 years.

The current pension system is a huge burden on the government with generous pay-outs that make it all unsustainable. Experts point out that pensions for retired government employees — less than one per cent of the population — cost 2.5 per cent of the country’s GDP. And what about the 350 million outside any pension system?

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