Provident Reforms

The government is now considering further liberalisation of the pattern of investment of provident funds to ensure higher return on the corpus. Earlier, an idea was mooted to allow provident funds to plough their interest earnings into higher yielding capital market instruments. The investment patterns were liberalised on October 1, 1996 whereby the amount to be invested in special deposits was reduced from 30 per cent to 20 per cent, and this correspondingly increased investment in bonds and securities of public sector financial institutions from 30 to 40 per cent.

A new range of proposals are now in the offing. These include removal of wage ceiling for the purpose of membership of provident funds, enhancing the rate of contribution from the present level and allowing the Central Board of Trustees of Employees Provident Fund to decide on the pattern of investment including diverting the funds locked up in a public account to normal investment avenues.

 

While these are significant steps which liberalise the avenues of pension funds, neither increasing the level of contributions nor increasing the interest on provident fund deposits alters the deficitary nature of the system. These initiatives, small though significant, fall short of a complete transformation of the system , which is what is required. It is important to see the corpus of provident and pension fund as a link between the labour and the capital market, and move away from the notion of it being a captive source of capital receipts for the government's own use. The primacy given to government in using these funds, even for its financing its current expenditure, have been borne by the economy and the markets. For instance, the debt market has suffered greatly because of the restriction on the movement of savings from one segment of the market to another. What is needed is a pension system which will integrate and improve the functioning the debt and capital market as well as the labour market.

In the context of the overall direction of change it is open to consideration that pensions and provident funds should be taken out of the government's total control and thus removed from a system which has benefited neither the government nor the investor. Instead of pre-empting resources in the name of managing them, the government should only supervise and lay down the basic guidelines for fund managers to operate and administer. Such guidelines should effectively ensure that fund managers conform to the requirements of safety, yield and liquidity. The added advantage of such a system is that pensions cease to become a government issue, thereby depoliticising yet another a huge sector of the economy.