No overseas exposure by pension funds

GOVERNMENT HEEDS LEFT PARTIES` CONCERNS

The four Left parties may no longer be allies of the Congress party-led United Progressive Alliance, but their concerns on the pension Bill will still be addressed by the government.

Officials said the finance ministry, which is sending the final Bill for law ministry clearance, has decided to bar fund managers from investing overseas. Also, individuals will be allowed the option to invest their entire corpus in debt instruments.

In addition, the foreign investment ceiling will be linked to the cap prescribed for the insurance sector, which is at present limited to 26 per cent. The government is keen to raise the cap to 49 per cent, but officials said the move would take time to implement as a group of ministers is yet to finalise its recommendations. As a result, the current focus is on pension and banking sector reforms.

The three key recommendations of a Parliamentary standing committee have been incorporated in the revised Bill, which has been approved by the Union cabinet, two sources familiar with the matter said.

“We are ready with the Bill. It’s only a matter of putting a few comas here and there. If the political green signal comes, the Bill will be in Parliament during the monsoon session (due to start next week),” an official said.

The government had introduced the Pension Fund Regulatory & Development Authority (PFRDA) Bill in 2005, despite opposition from the Left parties, but could not go back to Parliament after receiving the standing committee’s recommendations.
 

PENSION BILL: LEFT TURN 

(Key recommendations of Parliamentary committee incorporated in the Bill) 

* Fund managers to be barred from investing overseas 

* Individuals will be allowed to invest their entire corpus in debt instruments 

* Foreign investment ceiling will be linked to the cap prescribed for the insurance sector (26% at present)

Legislative backing to the PFRDA will enable the regulator to issue rules for the entry of fund managers, prescribe investment norms, put in customer service guidelines and list out the type of schemes to which individuals can subscribe.

In the absence of these guidelines, PFRDA has signed agreements with three fund managers — UTI Asset Management Company, LIC Mutual Fund and SBI Mutual Fund — to manage the Rs 1,500 crore collected from central government employees after it shifted to a contributory pension plan in January 2004.

Sources said the option to invest the entire corpus of an individual’s savings in debt was suggested by the interim PFRDA headed by D Swarup and the standing committee agreed on the idea.

Although the option, available in many countries including the United States, will be given, sources said it may not be the default option. The regulator intends to allow fund managers to provide a menu of options to investors based on a list prescribed by PFRDA. If an investor is unable to decide on a scheme, the default option will come into play.

Sources said the regulator might settle for a life cycle plan as the default option because it would allow investors to invest more in equities during the early years. They could shift to a balanced investment pattern of, say, 50 per cent debt and 50 per cent equity when they are in their forties, before seeing the share of debt investment rising when they reach the mid-fifties.

At the end of their working life, investors would get 60 per cent of the investment in cash, while the remaining 40 per cent would be used to buy annuities from an insurer.