NEW DELHI: Two key developments triggered much hope and euphoria about the pension sector in the last few weeks: one, the Employees’ Provident Fund Organisation (EPFO) finally decided to appoint multiple fund managers. Two, the government’s path-breaking decision to modify existing investment pattern for non-government PFs, superannuation and gratuity funds.
But it’s time for a reality check. With the EPFO yet to post on the web all the data on its investment and subscriber accounts, as a finance ministry source points out, it may have taken the second (no matter how good) step first by having multiple fund managers now. He calls it a grave error, which the Pension Fund Regulatory Authority (PFRDA)—that oversees the new pension scheme (NPS)—has scrupulosuly avoided. Had the data been posted on the web, a PF official or a subscriber anywhere could have accessed all relevant data on his/her personal account and investments. Such transparency would also discourage fund managers from sitting on PF funds for an inordinately long period. Cutting down on that time means money, in terms of interest earned for the subscriber.
Even the first phase of ‘Reinventing EPFO,’ the crucial project to ensure optimum efficiency in the EPF organisation, will take at least another year to complete. That could leave several loopholes. Worse, it also makes a mockery of two key EPF claims: one, that of individual accounts which, by definition, implies seamless countrywide portability and the option to choose where to invest PF money. And two, its subscriber count becomes questionable. The estimated subscriber base is four-crore plus and another 40 lakh workers are set to be added to that. Pension sector observers peg duplicate accounts at 3%, set to show up when data goes fully online. That has both financial and political implications.
Prioritising core pension operations could have meant that reserve surpluses of earlier years would be open to scrutiny. That could have also discouraged Houdini-type manoeuvres. Again, without all data fully online first, it would mean that even professional fund managers could repeat the mistakes made by the SBI earlier, in terms of letting funds lie idle for long.
In contrast, the PFRDA not only prioritised all its operations online before issuing tenders to hire fund managers but also appointed the NSDL as central record keeper. According to PFRDA chief D Swaroop, although the PNB AMC had a greater reach, the regulator chose SBI since it cited a shorter intermission (oneday) between the time pension funds were deposited in the bank and the time it was invested.
Again, despite the new investment pattern prescribed now for non-government, superannuation and gratuity funds, a ‘sea change’ is unlikely (at least in the EPF governed and exempt funds) in investment patterns vis-a-vis the capital markets and private sector. “The question is not of investment pattern change, but of investment attitude. Unless the attitude changes, there’s no guarantee that any new investment pattern would substantially increase the returns for PF subscribers,“ notes the ministry source.
In fact, the only segment in the pension sector that appears set to make optimum use of all these changes is the NPS. It may be the first to tap into other new options offered. These include the option of investing up to 40% in debt securities of a minimum three-year tenure issued by banks and FIs. Also in corporate bodies and TDRs of minimum one year issued by SCBs, and rupee bonds of minimum 3-year maturity issued by IBRD, ADB and IFC. Ironically, the existing option to invest 5% of the funds in direct equity, as yet unavailed by EPFO board, is already being used by the NPS. As the only pension fund—apart from excluded funds—currently not governed by the investment choices of the EPFO board, the NPS is expected to avail of the current option of investing in shares of companies on which derivatives are available. According to PFRDA officials, around Rs 300 crore of the NPS funds could well be invested in equities once the new pattern goes into operation on April 1, 2009. In contrast, the EPFO board rejected the option of mandatorily investing 10% (comapred to the 2003 optional investment of 5%) in equities and equity linked savings schemes (MFs). What is interesting is that the 2003 pattern had almost as much the same options vis-a-vis capital market invesments in the private sector.
One change to come in near future is PFRDA getting statutory status. That would make the finance ministry notification on investment pattern infructuous for the NPS. The NPS would then be, unlike an excluded PF fund, totally free to take a call on investment— either give prior direction to fund managers or judge them later on the basis of returns to subscribers. If the markets are on a roll, subscriber will benefit and if they are down, then again, the best possible returns are guaranteed.
