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Pension bill to limit investment option

Last updated on: June 01, 2006 13:48 IST
The proposed PFRDA bill, aimed at setting up a regulator and manage a new pension system, will not allow pension schemes to invest their money in individual stocks.

The Pension Fund Regulatory and Development Authority Bill (PFRDA) bill, which has already been vetted by the Law Ministry, will only allow contribution to the pension funds to be invested in index funds in the stock markets, interim pension regulator D Swarup told PTI.

Existing pension products, offered by mutual funds and insurance companies, will have to comply to new norms for the proposed pension sector, Swarup said. Currently, these funds invest subscribers money in individual stocks too.

While index funds do not provide as much returns as individual equities, they are not as prone to volatility, Swarup said. However, there would also be a provision for risk free scheme, which would invest all its money in government securities, he said.

The minimum initial paid up capital requirement in the proposed pension sector will be somewhere between Rs 10 crore (Rs 100 million), needed for mutual funds, and Rs 100 crore (Rs 1 billion), prescribed for insurance companies, he said.

It is expected to be less than Rs 100 crore but more than Rs 10 crore, Swarup said. Though mutual funds are regulated by market regulator SEBI and insurance companies by IRDA, there was a need of sepcialised pension regulator, Swarup said adding his viewpoint was supported by IRDA Chairman C S Rao.

As per the PFRDA proposal, there would be at least one pension fund in the public sector. But, LIC, SBI and UTI MF have evinced interest in entering the pension sector, Swarup said. ICICI, Aviva, HDFC have also shown interest, he said.

As per the earlier proposal, there would just be six companies in the pension sector to start with.

But, Swarup said all those qualifying PFRDA's stringent conditions like minimum paid-up capital, track record, electronic connectivity, countrywide reach and those meeting cost parameters, could be licensed.

But, companies should have "reasonable" assets under management as margins in this business were thin, he added. Considering this, there would not be a large number of companies in the pension sector to start with, he said.

Swarup said investors to pension funds could switchover from one scheme to another within one pension fund as well as from one company to the other in between.

To provide this flexibility, only those companies, which have electronic connectivity will be licensed. Besides, only those collection centres would be allowed that have this facility, Swarup said.

As per the proposed scheme, a subscriber could deposit his money at any collection centre at any place since all those would have electronic connectivity, he said.

The PFRDA Bill will now have to wait for monsoon session of Parliament since it could not be introduced in the just concluded session. The New Pension Scheme was launched by the government for its employees joining services after January 1, 2004.

Subsequently 16 states have introduced NPS, which has only defined contribution and not defined benefit unlike in the earlier scheme. The yearly accretion of the contribution to the NPS is about Rs 500 crore (Rs 5 billion) a year.                                                                                                

                                                                                                           

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