Pension fund with assured return likely

New Delhi, Nov 15 | Updated: Nov 16 2005, 05:30am hrs
To carry the new pension system (NPS) past the obdurate Left, the government is set to include a scheme that would offer subscribers a minimum rate of assured return. The subscribers will have to pay a fee for this risk-free option. The scheme is being proposed in a Cabinet note drafted by the finance ministry, after the parliamentary standing committee on the NPS gave its views on the controversial issue.

According to official sources, the proposed scheme would have an underlying market mechanism to mitigate the risk that would solely fall on the employer. They added that the mandatory default option - automatic shifting of those who fail to make choices to the safer pure g-secs option - would also be part of the NPS. The ministrys note also proposes allowing up to 26% FDI in the pension sector.

The Pension Fund Regulatory and Development Authority would be empowered to determine the portfolio composition with regard to the schemes to be offered under the NPS, officials said.

The NPS that would broadly mark a shift from the concept of defined contribution to that of defined benefit would have a 100% g-secs scheme, which implies that the subscriber will have the option to put his entire fund in such securities. The scheme would be a low-risk-low-return one.

PFRDA had earlier ruled out
any guaranteed return on
pension funds
Assured return was the only way
to get the Left agree to reforms
Subscribers will have to pay a small fee for minimum assured return
Draft Cabinet note also proposes
26% FDI in the pension sector
The PFRDA had earlier categorically said the new system would not offer any assured return scheme. However, there was pressure from the Left parties to incorporate a scheme which would guarantee a minimum return. If the Cabinet okays the current proposals, the Bill would be introduced in the forthcoming winter session.

The PFRDA Bill proposes that at least one pension fund manager should be from the public sector. It may also have a clause under which no subscriber would have the flexibility to withdraw any portion of the fund at any point until retirement.