Playing the market

Pension funds should be invested in a way that pensioners can be at peace and live with dignity

There has been a wide range of discussions on pension funds. The piece entitled, ‘Lost: 13,000 chances’ by Gautam Chikermane (IE, October 31), gives a view that needs to be corrected.

All the money to the provident/ pension fund is contributed by employees from wages. The pension funds were initiated for salaried employees, both in the private and public sectors, with the objective of sustaining them after retirement. The private companies had their own ‘funds’ which more often than not were bled, resulting in the unhealthy condition of such funds. This prompted the government to abolish private provident funds and expand the public provident fund to cover wage earners.

The organised sector wage earners, who formed a small minority of wage earners, contributed to the provident fund as compulsory savings. Some also opted to save through the LIC. Of that, a smaller section ‘saved’ by tightening their belts to meet the cost of weddings in the family. These savings were religiously deposited in banks which were considered risk free. All these ‘savings’ mentioned went as loans to the government and industry. It may be of interest to know that in India, 40 per cent of private savings are in banks; 50 per cent in government sectors like insurance, provident fund or government bonds; and only 10 per cent is in the share market. People are averse to investing in shares — driven off by periodic scams.

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Many of the contributors to the funds are tax payers. But provident/ pension funds are not infused by taxes. Money from pension funds was lent to the government and earlier the government saw it fit to pay an interest of a third the commercial rate prevailing then. Chikermane is misrepresenting facts by branding the interest paid to pension funds as unfair.

One more reason why pension funds should not enter the market is that the share market is a zero sum game. No significant new companies or IPOs have come in recently. The same shares are sold again and again to different buyers, keeping their prices in an upward spiral. Besides, ‘hot money’ — the FII— has flooded the market and prices have zoomed. If pension funds also enter the market, it will be boosting the value of these same shares.

Chikermane’s presents a bogey when he says India will not be able to keep its pension commitments. This is outright misinformation. Pension in developed countries are in two fronts: one by the state for senior citizens, a social obligation. The other is like General Motors in the US, which is now finding its pension schemes cutting into its margins. Both are commitments made. If GM cannot pay the pension, it is like not paying to any other creditor — the power company or a component supplier. These examples are not applicable to India since taxes do not support India’s retired pensioners.

Pension funds should be invested in a way that pensioners can be at peace and live with dignity. If pension funds play the market, pensioners will have neither peace nor dignity.