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Risk cover for pension funds likely

September 17, 2005 17:38 IST

The Pension Fund Regulatory and Development Authority might consider insurance cover for pension funds in line with the structure prevailing in the US once fund managers start investing in equities.

Insurance of pension funds could be done by an independent pension guarantee corporation under the PFRDA.

Incidentally, the Deposit Guarantee Corporation under the RBI insures up to Rs 10,000 bank deposits of public banks. The body is submitting the draft guidelines for pension funds on Monday.

The chairman of PFRDA, D Swarup, said insuring certain amount of a pension fund is one option to minimise risk. But he said in the initial phase, PFRDA would not press for such insurance as in that case the cost involvement could be high for customers.

Swarup admitted that he was getting requests from insurers in this regard. "We might have such arrangement once the industry matures a little bit. Now we feel that if pension funds only confine themselves to government securities and debt instruments then risks will be minimised. Once it starts investing in equities later on, we could introduce a corporation
for insuring funds," he said.

According to him, investors have to bear a high load for premium if it is introduced initially. But over time and with expanding investor base, this could

be a viable option.

S K Mitra, director of Birla Sun Life and director of financial services of Aditya Birla group, one of the potential players in pension segment, strongly advocated in favour of insurance of pension funds up to a certain limit.

"This is the only way to minimise risk. Because today or tomorrow you have to invest in securities so such insurance could be vital. If Deposit Guarantee Corporation can do it for banks why not one for pension funds, at least for lower-end customers," he said.

Describing the model, Mitra said pension fund managers would pay premium for funds to the guarantee corporation and in case the scheme does not have enough money to pay all promised benefits then the plan would be
terminated and taken over by the guarantee corporation. The corporation, in turn, would start paying the benefits.

"This why we need multiple players in pension. More players means more premium for the guarantee corporation so the cost of insurance will be lower. In case of 2-3 players, the cost could be prohibitive," he said.

Incidentally, Swarup was also in favour of not putting a cap on the number of players in pension fund. Mitra said it would take 10 years for pension funds to reach break even considering the fact that the charges that the fund managers could levy is likely to be low.

Udit Prasanna Mukherji in Kolkata
Source: