Cabinet approves 26% FDI in pension sector

In a move that would help bring much-needed marketing strength to India?s burgeoning pension industry and diversify the product basket to enable its rapid growth, the government on Wednesday decided to allow foreign direct investment (FDI) in the sector and strengthen the sectoral regulator with statutory powers.

To start with, FDI in pension fund management will be capped at 26% but by separating the issue from the principal legislation and deciding to define the same only in subsequent regulations, the government has made it easier for it to raise the limit as and when needed. This is because Parliament?s consent won?t be required to amend the regulations. ?This is an enabling provision, and the government felt that there should be more exposure to the international market,? a senior government official said, on condition of anonymity.

Allowing FDI in the pension sector has been a highly contentious and politically sensitive issue. Many attempts by the UPA-I government to allow foreign investment in pension fund management were thwarted by the Left parties, which supported that government from outside.

The likely foreign investors in Indian pension sector include large pension fund managers (PFMs) in the west. The largest PFM in the US, California Public Employees? Retirement System, manages assets worth $227.5 billion, while the second largest ? California State Teachers? Retirement System ? manages $139 billion. Given the ongoing economic crisis in the west, it is uncertain whether funds like these would invest in India at this juncture, but given the huge growth potential of the Indian pension market, their entry into the country at a later date is a foregone conclusion.

In the insurance sector, the FDI limit ? 26% ? is prescribed in the respective Act and a proposal to raise it to 49% is awaiting Parliament’s nod for long. In other financial sectors including private sector banks, depositories, stock exchanges and asset reconstruction companies, FDI limits are not specified in the respective Acts, giving the government leeway to make changes through executive orders.

With the Cabinet clearing the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, on Wednesday, it is likely to be taken up for consideration and passage by Parliament in the winter session beginning November 22.

The PFRDA Bill has already been scrutinised by the parliamentary standing committee on finance. Foreign investment in the sector is expected to boost pension coverage in the country where millions enter the workforce every year. It would also enable extension of pension benefits to informal sector employees, who are largely outside the network at present.

Foreign firms have been keen to get into India’s growing but under-penetrated pension market. As per a 2007 estimate, only 10.2% or 37 million of the 363 million paid workforce aged 15 to 65 were enrolled in a pension scheme.

The proposed legislation will not provide assured returns to the subscribers of pension schemes, although subscribers would have various options including ones that involve only marginal exposure to stock markets.

The parliamentary standing committee headed by senior BJP leader and former finance minister Yashwant Sinha wanted the government to specify the FDI cap in the legislation, in line with the insurance sector regulation where the government is already facing opposition for raising the cap.

The committee also wanted to provide minimum guaranteed return to subscribers, as it is done by the EPFO.

Sources said the government turned down the committee’s recommendation for allowing greater flexibility to subscribers of pension schemes for premature withdrawal of funds from their accounts.

“The flexibility of withdrawals from funds under the pension scheme, however, would be tightened. It would be allowed only in case of genuine need… It would be considered when the need is critical. It will not be allowed for frivolous reasons,” a source explained.

The government, though, upheld the panel’s suggestion to provide greater participation of employees and stakeholders in the Pension Advisory Committee, the official said.

Pertinently, the EPFO, having the largest chunk of retirement assets, will be outside the ambit of the PFRDA Bill. The EPFO manages around Rs 3.7 lakh crore of workers’ savings and monitors the functioning of about 2,700 PF trusts managed in-house by companies with assets around Rs 2 lakh crore.

The New Pension Scheme (NPS), the main product under pension regulator PFRDA, was initially restricted to government employees but has subsequently been extended to all citizens. This was done in order to bring the informal sector workforce into the pension network.

The NPS has garnered retirement assets of about Rs 8,000 crore till last fiscal. As on March 31, 2011, 1.7 million members registered under the NPS, which was made mandatory for central and state government employees in 2004. However, barring about 43,000 accounts, the rest were mandatory accounts, covering central and state governments, autonomous bodies and public sector undertakings. The voluntary enrolment to NPS has remained negligible.

Currently, six PFMs invest retirement assets in line with investment guidelines issued by the PFRDA. Pension products are also being sold by insurance companies and mutual funds.