The long-awaited Pension Bill has taken another tiny step towards actualization. The cabinet has given its approval to the bill and all that remains is for the parliament to pass the law. Going by the scorching pace that pension reforms have proceeded till now, India is on track to get a new functioning and inclusive, pension system any decade now.
However, it's a little puzzling to see the excitement generated by the FDI part of PFRDA Bill. The bill allows foreign direct investment but does not put any limit to the FDI percentage. According to more than a few commentators, this shows a certain determination on part of the government to restart the reforms process, at least in the financial sector. The logic seems to be that the kind of FDI level choke that the insurance sector is suffering from cannot now happen in the pension sector.
This logic is puzzling. What exactly would the role of FDI be in the pension sector? FDI is crucial either when a huge amount of capital is needed (as in insurance), or some knowhow is needed which the foreigners won't part without owning a good part of the local business. Neither has any relevance to running a pension fund. The actual capital need for running a pension fund would be what, maybe five or ten crores? Running a pension fund is just an investment management business because the front-ending is done by banks and other POPs (point of presence) and the record-keeping is done by NSDL. An asset management company or a bank could add pension fund management to its activities by literally adding nothing but five or six people's salaries to its cost. Indeed, that's what the existing pension fund managers have done. If there's a sector that has no need of FDI, then this is it.
The government's refusal to add minimum guaranteed returns to the PFRDA Bill (which the Yashwant Sinha standing committee had recommended), is the right move. The starting point of the new pension system was the need to limit the government's future liability. A guaranteed return would have made the whole exercise meaningless. However, the demand for a guaranteed return reflects what many Indians expect from a retirement system-a fixed return. As the pension system evolves, one would expect plans with low returns and negligible risk to be actually quite popular.
The real reform that is needed in the retirement savings system is an overhaul of the EPFO. With the PFRDA heading towards a proper status, the next step would be to unshackle private sector PF from the EPFO and merge it with the NPS.