Finally, a step forward on long-stalled pension reforms

In general, the investment avenues for pension fund managers are on the same lines as the recommendations from the OASIS report, which kickstarted the pension reforms process in the country in early 2000. Though there are no finite number of schemes specified, the fund managers have to invest within limited instruments.

Government debt securities will be the main investments of the safe ‘‘risk-free’’ schemes.

Fund managers can also invest in publicly traded debt paper of Indian companies that are rated as investment grade by at least two rating agencies. However, in an era where most companies borrow overseas or use the private placement route for domestic loans, opportunities in this category may be hard to come by.

Investments in microfinance companies that are guaranteed by the Reserve Bank of India will also be permitted.

For growth (higher-risk) schemes, managers can dabble in Indian equities, but only if they are part of an index approved by the PFRDA. Moreover, the PFRDA lists the key intermediaries as the pension fund managers (PFMs), the Central Record Keeping Agency (CRA), which will be similar to depositories in the stockmarket, and the Points of Presence (PoPs) through whom members will access the system, like the local branches of banks or brokerage houses.

While this draft rulebook is not exhaustive, the financial services industry players keen on joining the pensions business, will be reading them closely. Interestingly, the draft norms have a strong consumer focus, while simultaneously trying to allay apprehensions of the Left parties.

Intermediaries, who will most probably be selected on the basis of lowest bids on costs, are worried that cut-throat competitive bidding may make the business unviable for successful bidders.

The draft rules do not specify the number of players that will be allowed into the pension fund management business, but finance ministry officials have so far been inclined towards having a finite number of players, like six or nine.

Interestingly, the draft rules also ban offering of rebates or incentives by the intermediaries to members. But if the learnings from the mutual fund and insurance industries are considered, the PFRDA will need to think of better ways to prevent rebating than a mere ban on paper.

The public and industry players can write in with their comments on the draft rules till October 3, 2005. Such a consultation process will certainly help faster implementation of the scheme, after the PFRDA bill is actually passed. But when the bill will be tabled in Parliament is anyone’s guess.