While the new pension law will allow greater private participation, it must be more open to investment
Earlier this month, the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, was passed in both Houses of Parliament after being in limbo since 2005, and with the assent of the president last week, it is now a law. Though an interim PFRDA, set up a decade ago, had been overseeing the New Pension Scheme (rechristened the National Pension System, NPS, in the 2011 bill), operational since 2004, the law will formally establish PFRDA as the statutory regulator of the pension sector in India.
The act will allow greater private sector participation in the pension sector, which shall usher in more competition and product differentiation. The pension sector will also open up to foreign direct investment, with a cap of 26 per cent as per the current provisions, which will be increased automatically to 49 per cent once FDI in insurance is approved to the same extent. These are significant steps towards greater financial sector reforms, and will help in a healthy and disciplined growth of the pension sector, spearheaded by its own old-age retirement scheme, the NPS.
The NPS, which captures elements of both systematic investment and pension planning, has had limited success in terms of coverage and assets under management (AUM). The NPS is mandatory for all Central government employees (other than the armed forces) who joined service in 2004. The scheme has been open for voluntary subscription since May 1, 2009. Till August this year, the subscriber base, including government employees of 26 state governments who have adopted the NPS, stood at 52.83 lakh, amounting to a meagre 1.15 per cent of India’s total workforce of 460 million. The total AUM was Rs 34,965 crore in the same period. This is expected to change over the next few years as a statutory status to the PFRDA could help move a significant sum from the superannuation schemes of the private sector, estimated to be over Rs 10 lakh crore, to the NPS.
The act has provisions for subscribers to opt for minimum