With the passage of the Pension Fund Regulatory and Development Authority Bill 2011 in Lok Sabha on Wednesday, the UPA has scored yet another goal in securing the trust of the people, this time targeting the middle classes, particularly those belonging to the service sector and in government jobs. The bill, which will lay open the doors for foreign investment in pension funds and create a regulator for the sector to extend the coverage of pension benefits to more people, had been in the offing since 2005, but it had met severe opposition in Parliament, once in 2005 and then in 2011, when it was reintroduced.
Although the fact that the bill allows 26 per cent FDI in the pension sector, thus driving in more competition into the pension market and bringing more people into its ambit, is good news for many, there are sticking points in the legislation that need to be addressed as well. Hence, even though there are marked benefits such as allowance to opt for investment of funds with minimum assured returns, as well as permission to withdraw from individual account within regulations, not everything is rosy about the New Pension Scheme (NPS), that has been made mandatory for all central government employees (except armed forces) entering service with effect from 1 January 2004.
With about 26 of 28 states having notified NPS for their employees and the number of subscribers having crossed 52 lakh in August 2013 with a corpus of Rs 34,965 crore, clearly pension is likely to become more accessible and available for workers of the country and will become a veritable source of savings, especially as pure pension product without being attached to insurance investment, in the absence of social security.
However, there is another side to the story, which is not all that splendid. Firstly, it is not very clear how exactly the people are going to benefit from the hiked FDI ceiling in pension sector, since the money stays with the banks, and not exactly with the employers. Moreover, there has not been enough discussion on how to keep a tab on the number of foreign investors into the pension sector, even though a fair share of the employees’ salary is deducted to account for the pension fund. So it is debatable whether the pension fund is really working towards alleviating the woes of retirees, since it still does not account for the steep inflation along with the rupee devaluation that have together sent the economy hurtling towards a fiscal nadir. In addition, while there is likely to be more ‘players’ in the pension market, it cannot afford to be just a profit-making sector, since the hard-earned money of the middle classes will be at stake.
Hence, the NPS needs to have better regulation of the banks and private investment firms that will be putting in their share to provide for the post-retirement security of the millions in our service sector, and should ensure that the hard work of our middle classes don’t go down the drain. Furthermore, while the FDI hike in pension sector is likely to bring in more capital influx and global investment, thereby relieving the economy to some extent by pumping in dollars, it will also make the sector more vulnerable to the shocks and disruptions in the volatile global market, creating a possibility of high crests and troughs in the sector. Evidently, while NPS looks poised to bring in some relief, factors such as inflation and susceptibility to external forces must also be accounted for.