Pension funds are, in essence, a promise made to savers to look after their needs during retirement, if they save during their working years. Imagine the social chaos which would ensue were that promise to be broken. It is in serious danger of so being.

California’s State Pension Fund is underfunded by $1 trillion ($93,000 per household!) There is no way in which the State can find the resources to fund it.

Between devil & deep sea

The shortfall in Illinois State Pension fund is 37 per cent. Contributions to the pension fund by the government eats up 25 per cent of its revenues! The choice is, therefore, between adding more to its contribution so that the underfunding gap reduces, or cutting back on other services, such as education or social services.

The problem has arisen, chiefly, because the assumptions of return on assets cannot be met with interest rates hovering at, sometimes below zero. In order to fetch higher returns (a return of around 7.5 per cent is needed to meet liabilities) pension funds have moved into riskier assets, such as global equities and even into hedge funds! This influx of money helped stock and bond markets reach new highs.

Funnily enough, India has an opportunity to gain, if it markets itself well. Even as pension funds abroad are searching for annuity assets, India has them aplenty, in its planned spending on infrastructure. Toll roads, for example, are annuity assets. They provide a steady stream of returns over a long period of time.

Ensuring sanctity of deals

But to encourage investors to invest in such projects, the government and, importantly, the courts, must ensure the sanctity of contracts.

As mentioned in a previous column, in the case of Noida Toll Bridge, the Supreme Court has, in what seems an incorrect decision, over-ridden the sanctity of contract, and has ordered the company which implemented the project to stop collecting toll, even though it had not completed half its term; and even though there are two other, toll-free roads available for use.

If we are seeking to attract pension funds we just cannot ride rough shod over signed contracts.

Another unsavoury example is the RBI regulation that is preventing the Tata group from honouring its commitment (which it claims it intends honouring) and the international arbitration award, to pay its former partner in Tata Teleservices, NTT DoCoMo, half the money the latter had invested.

At the same time, JICA, the Japanese investing agency, is funding the Mumbai-Ahmedabad bullet train project, and Japan is funding the important DMIC project.

Petty objections

India has a lot of investing to do, especially in building up its infrastructure. And in providing jobs. It cannot afford to raise nettlesome and petty objections every time if it hopes to attract investment.

For instance, in the case of ride sharing companies, such as Uber. There is a lot of resistance to Uber and other players in the segment, especially from older services which find themselves unable to compete with the better ride, often at a lower cost. They are trying to put stumbling blocks. But Uber has promised to create 10 lakh new jobs, and has rented two lakh square feet of office space in Bengaluru.

So, the government must decide to what extent it wishes to heed objections raised against a company working towards providing 10 lakh jobs and which has rented huge office space during a slump.

(The writer is India Head, EuroMoney Conferences. The views are personal)

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