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Home > Business > Business Headline > Report

Salaried 'unlikely to fall for pension plan'

Freny Patel in Mumbai | August 30, 2003 12:26 IST

Blue collar and salaried employees are unlikely to bite the bullet and opt for the proposed pension scheme unless returns offered are in line with that of the Employees Provident Fund at 9.5 per cent and Public Provident Fund at eight per cent.

New central government employees will have to participate in the pension scheme as the government moves away from defined benefit to contribution benefit pension scheme.

As blue collar workers are already part of the PPF or the EPF, where interest rates are defined and relatively higher than the market rates, it is unlikely that fund managers will see explosive growth, pointed out G V Nageswara Rao, IDBI Capital Market Services Ltd's managing director.

He was part of the committee involved in the proposed pension scheme.

"We do not see explosive growth in the volumes as growth figures will be limited to central government employees initially, before state government employees also join the scheme," said Nageswara Rao.

Only when the returns on EPF and PPF are no longer administered, but left to be determined by market realities, will there be a level playing field with the proposed pension funds, stated a senior official with a leading mutual fund that is eyeing the pension business.

Nageswara Rao said that when EPF and PPF returns are market related, attractiveness of the pension schemes would depend upon the fund manager's skills.

"Eventually, the long-term potential is of getting EPF and PPF into the scheme. However, today the idea is to get the system going, establish track record and then expand coverage," said Nageswara Rao.

Another senior official pointed out to the advantage pension funds would have over other administered funds as the government has stated that these funds can invest up to 50 per cent in equities.

This is unlike PPF and EPF, which are barred from making any investments in the stock market.

Despite the limited volumes, mutual funds, insurance companies, provident fund managers and banks as well as some merchant bankers are vying for a share of the government business.

ICICI Prudential Life Insurance Company has today a major chunk of the pension pie but is keen to diversify its portfolio base and get access to government employees, said the company's CEO Shikha Sharma.

Commenting on the investment structure, Sharma said that insurance companies offering market-linked/unit-linked pension plans can already invest the entire corpus in equity under the growth option.

The performance of some of these schemes have proved equity investment to be advantageous.

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