Analysts Say Govt Should Keep Off Pension Funds

While the Indian pension market is expected to touch Rs 200,000 crore in the next five years, analysts say the government should not set up any pension funds as that will create an eneven playing field for the new sector.

A paper prepared by AT Kearney for the pension sector says such a fund can create an uncomfortable situation of "offering higher returns by cross-subsidizing the fund with other public resources and using free infrastructure to lower operating costs". The paper adds that "artificially high returns paid by the government fund will also undermine confidence in the pension reform".

The comments by Rahul Chaddha, manager at the management consultants, comes in the wake of the government's plans -- announced in the budget this year -- to open up the sector. A committee has been set up by Irda to come up with a set of rules for the pension funds, while the government has set up another high level body to examine issues that need to be sorted out before a possible takeover by the private sector for the annual Rs 22,000-crore-worth government pensions. This market is also expected to grow to at least Rs 33,000 crore by 2010, according to a CGA report.

 

It is expected that the high level committee will recommend allowing private fund managers to handle the sensitive issue of managing pensions of new government servants. But, to ensure that existing employees also opt for the same, analysts expect that the committee will come up with a set of firewalls to safegaurd the sum. This may also include creating a set of safety nets to encourage funds like EPF to graduate to a market determined pension fund.

The AT Kearney paper has also warned against propping up inefficient financial institutions in the garb of pension reforms. It says there should be a political willingness to let old-established enterprises fail. On the size of the market, Chaddha says, to enjoy the benefits of the eventual market, size-players should have a long-term intent. "Regulation on administrative expenses and return targets will require firms to dig in and play for the long term. But should a larger number of players come into the fray the costs of customer acquisition may create issues for bottom line maintenance."

AT Kearney also says that any move toward a mandatory funded pension component should be postponed until sound rules governing the basic forms of contractual savings and fiscal intermediaries are in place, with strong and non-political regulatory agencies in place.

Also the government should avoid any decision to limit pension fund investment to government-backed debt in the early years of operation. Chaddha said this will hamper the efficiency of capital markets. Pension reforms he added should not be used to prop inefficient firms or concentrate control of capital in the hands of a relatively select few.