Overdue reform

It took nearly a decade for the pension bill to be cleared by Parliament, with the Rajya Sabha giving its approval on Friday.

The new pension scheme (NPS), which is now to be widened, strengthened and given statutory support, was initiated by the NDA government. It was applicable to all those who joined government service from January 2004.

The proposed scheme, to be given effect by the bill, will cover both government employees and the unorganised sector, and it is expected to grow into one of the largest pension schemes in the world. It has a corpus of  Rs 35,000 crore and a membership of 53 lakh now but it may be able to manage up to $ 60 billion by next year, with a large increase in membership. At present only about 12 per cent of the population  have some form of old age social security. The new scheme should reach out to the majority of people.

The most important requirements of a pension scheme are reliability, scope for choice, transparency and fair returns. The Pension Fund Regulatory and Development Authority (PFRDA) will be an independent and statutory body and will therefore be insulated from political or other interests that gravitate to big money. There are ample safeguards and choices for subscribers.

There will be high-risk, high-return schemes, which invest in areas like stock markets, and others for risk-averse persons. A parliamentary committee’s suggestion that there should be at least one scheme offering fixed returns has been accepted, and at least one pension fund manager has to be from the public sector. Pension funds cannot be invested in foreign markets. There is a demand to allow members of the existing employees’ provident fund scheme to shift to the new pension scheme and this may be considered.

The issue of foreign investments in pension funds has been contentious. A 26 per cent limit has been prescribed in the bill, and it may be raised to the level approved in the proposed insurance bill. Since pension funds are operated on a long-term basis, it is unlikely that foreign funds will move out like hot money invested in stock exchanges. Pension funds, a lot of which may be invested in infrastructure projects, will also help to address the problem of shortage of investment. The scheme should be given good publicity to attract as many members as possible.