Lok Sabha passes pension fund bill

The Lok Sabha has passed the Pension Fund Regulatory and Development Authority Bill (PFRDA), 2011, to regulate the New Pension System (NPS).

The bill was introduced in the lower house in March 2011 to provide for a statutory regulatory body. Currently the PFRDA has a non-statutory status.

NPS has been made mandatory for all the central government employees (except armed forces) entering service with effect from January 1, 2004, a finance ministry statement said. In all, 26 states have already notified NPS for their employees.

"NPS has been launched for all citizens of the country including un-organised sector workers, on voluntary basis, with effect from May 1, 2009," the statement added.

The ministry said the PFRDA Bill would also provide subscribers a wide choice to invest their funds for assured returns by opting for government bonds as well as in other funds depending on their capacity for risk.

The lower house of Parliament also approved changes aimed at luring foreign asset managers to run retirement funds, a small victory in the government efforts to rescue the economy before elections next year.

Wednesday's vote will slightly loosen rules governing foreign investment in pensions, and is a step towards creating a viable private pension industry to cater to the growing middle class in the world's second most populous nation.

"When the bill is passed, I expect that some more FDI will come in," Finance Minister P Chidambaram said after the debate, referring to foreign direct investment (FDI).

The bill must now go to the upper house, where it is expected to get final approval.

But foreign firms say the new law is unlikely to immediately trigger the flood of investment the government is looking for to kickstart Asia's third largest economy and help stem a sharp depreciation in the rupee.

The bill links the ceiling on foreign investment in pensions to a related law governing the insurance industry. A revised insurance law in the works would raise the cap to 49 per cent from 26 per cent in insurance, and therefore pensions, but it is opposed by opposition parties and unlikely to be approved soon.

Even at 49 per cent, some fund managers say India's current economic crisis means new investors will be slow to step up.

"This is a welcome push for the industry as the bill has a progressive approach, but increasing the FDI cap in the pension sector might not immediately result in a large inflow of foreign capital," said Anil Ghelani, chief investment officer at India's DSP BlackRock Pension Fund Managers Pvt Ltd, in which US-based BlackRock Inc is a minority partner.

HIGH-PROFILE EXITS

Foreign firms thronged to India when they were allowed to invest in the insurance and mutual fund industries last decade, but once in place they generally found it difficult to flourish.

In the last two years there have been high profile exits such as ING and New York Life from insurance and Fidelity Investments from the mutual fund industry.

The move for pension sector reform comes a decade after India established an interim regulator to steer the industry. So far, there has been little interest from private players, with just eight asset managers, including Blackrock, operating schemes managing about $4.5 billion in private sector assets.

This compares with the combined $76 billion managed by the state-owned provident fund and pension fund and over $115 billion managed by Indian mutual funds.

The push for a more inclusive pension industry is part of Indian financial planners' broader agenda to expand social support and channel domestic savings into the capital markets.

Most of India's half a billion workers still have little or no access to social security and stick to buying gold and real estate instead.