FE Editorial : Reduce tension

Written by The Financial Express | Updated: Feb 19 2009, 05:57am hrs
Pension reform has progressed a bit more. The Deepak Parekh committee report charts the application of the New Pension Scheme (NPS) for the non-government sector. The scheme is in line with the core principles of the NPS, guaranteeing low costs for contributors through competitive bidding between fund managers, low transaction costs, a life-cycle fund for passive investment and full flexibility for the investment of pension funds by investors. The introduction of this scheme makes a case for the development of a bond market for India. Even if most contributors choose the default option of passively managing their funds, the volume of investment in bonds issued by PSUs, firms and infrastructure funds will be large. The scheme is a close approximation to the NPS and is welcome, but there are problems. There should be a single pension system for India. Two branches of the NPS, with different investment guidelines and separate fund managers, increase the paperwork of the central recordkeeping agency. Fixed costs go up. Pension fund managers (PFMs) have lower volumes, and lose out on economies of scale. There are currently no provisions for a civil servant choosing to move to the private sector. A guiding principle for the NPS is portability of the individuals pension fund across locations and jobs. Merging the two pension systems, while retaining the flexibility of investment options, must be treated as a priority.

Another point is that although the bidding has been successful for now, there needs to be regular auctioning for PFMs to ensure that pricing becomes more accurate and contributors still get the lowest costs they can. It must be ensured by the PFRDA that the costs imposed on the contributor must be nothing but the fund management fees and the transaction costs; there should be no obscure overhead costs being charged. Finally, while it is commendable that despite recent turmoil, the committee emphasises that contributors have the option of investing all their funds in equity, their choice has been limited in another way. Investors are given the choice of changing their investment profile only once a year. This should be more frequentan individuals faith in the stock market may change during the course of the year. Having greater flexibility to avoid the impact of a financial crisis on retirment savings will give many contributors the assurance to go for the equity option.