The Hindu Business Line : Pension plan to offer 3 options

THE new pension structure promised in the Union Budget would be kicked off by the licensing of six pension fund managers (PFMs) who would be permitted to offer a limited bouquet of three schemes each to subscribers, with a maximum cap of equity investment of 50 per cent of the corpus under the growth scheme.

Investment in equities under the other two schemes - balanced and safe - would be restricted to 35 per cent and 10 per cent respectively.

The investment guidelines form part of broad framework for the new system worked out by the Government which is expected to guide the Pension Fund Regulatory and Development Authority (PFRDA) to be initially set up by an executive order and later given legal backing.

Other than equities, the PFM would be allowed to invest in rated corporate bonds and Government securities.

While under the Growth scheme, 25 per cent of the corpus could go towards corporate bonds and another 25 per cent to G-secs, the balanced funds can touch up to 40 per cent in G-secs and 25 per cent in corporate bonds, while in the safe scheme, 60 per cent has to be invested in G-secs and 30 per cent in corporate bonds.

Top Finance Ministry officials said that out of the six PFMs, one initially would be a public sector entity.

The remaining will be privately owned.

"The basic purpose of having a public sector PFM is to inspire trust and to provide a choice since there might be people averse to parking their money in private hands,'' the officials said.

However, they added that the idea was to eventually privatise the PSU entity and let the entire pension system to be manned by private hands.

"Building public confidence is very important in the initial stage. The option of privatisation can always be exercised later on.''

Under the structure worked out, the pension regulator would have the task of drawing new subscribers into the system, including non-Government employees and self-employed persons, on a voluntary basis.

"The new regulator should be in a position to replicate the system and take it to the remotest corners in quick time,'' the officials said.

According to them, figures worked out show that new Government employees to whom the new scheme would be restricted would not lose out as compared to the retirement benefits given to the existing employees.

Thus, a 25-year old employee contributing 7.5 per cent of basic salary (with a matching contribution from the Government) would have 50 per cent replacement rate of the last 10 months' average salary at the age of 60.

Salient features

One PSU and five private fund managers to be allowed

PSU fund managers to be phased out

Schemes to be limited to three - growth, balanced and safe

Maximum equity investment of 50 pc in growth fund

Annuity payout to match existing retirement benefit

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