Long overdue

Long overdue

The new Pension Fund Regulatory and Development Authority (PFRDA) bill, as approved by the Union cabinet, seeks to strike a realistic compromise between demands and possibilities. The legislation has been pending for over eight years ever since the NDA government set up the PFRDA through an executive order in 2003.

The bill was first introduced in parliament in 2005 but was withdrawn after the Left parties objected to some provisions. It was again introduced in March this year and referred to a parliamentary committee. Two important recommendations of the committee, headed by a BJP leader, have not been accepted by the government and this has given rise to some unhappiness in the party. This may lead to opposition from the party when the bill is introduced in the winter session.

There are two key features which will be hotly debated. One is the absence of a specific cap on foreign investment in the pension sector. The government will have the freedom to raise or lower the FDI cap without resorting to a legislative process. It is perhaps playing safe after it failed to get parliamentary sanction to increase foreign investment limit in insurance. Another important feature is the absence of assured minimum returns for subscribers.

The government’s view is that such a guarantee would limit the returns and actually defeat the purpose of having a pension system with defined contributions but unlimited benefits. Guarantee of a minimum return may not be possible because part of the funds will be invested in the stock market. But there are options and various levels of risk which contributors can opt for.

The new pension system, which has a corpus of about Rs 9,900 crore and about 24 lakh subscribers, has delivered good returns in a short span. It is managed by professional institutions like the SBI and the LIC and is open to employees of non-government organisations, but is mandatory for Central government employees who joined service after January 1, 2004.

Most states have also opted for the system. The new system was introduced because governments found it difficult to bear the cost of social security at a time of increasing work force and rising life expectancy. Pension funds can well serve the purpose, as in many other countries, if they are professionally and efficiently managed. If the bill is passed, it will mark an important step forward in the area of  economic reforms.