Outlook and proposals for pension fund utilization

While presently the EPFO earns over 9% on its current base corpus of Rs3 lakh crore, this could be enhanced to 12%. Besides, old peoples’ homes could be another avenue of revenues that the government can look at


While speaking at the 29th Skoch Summit earlier this month, UK Sinha, chairman, Securities and Exchange Board of India (SEBI) called for implementation of pension fund reforms. This, he said, “is long overdue”. He is right. We have a number of things to consider when such a proposal is finally gets off the ground.
At the recent CII Mutual Fund Summit, Mr Sinha reiterated that if an asset (mutual fund) manager came and sought approval of SEBI for a theme involving a pension fund, he would be willing to recommend the same to the Government of India.
In this connection SEBI are already in touch with the tax authorities and such a move is probable only after the Direct Tax Code (DTC) comes into operation.
A brief reference to pension schemes in operation would be informative in debating this issue of profitable and useful utilization of funds.
There are several schemes in operation. There is the Civil Servants Pension Scheme (for employees recruited up to 2003), Employees’ Pension Scheme, Employees’ Provident Fund and the Special Pension Scheme, with the last named three are available to private sector employees.
According to information available, the Employees Provident Fund Organization (EPFO) has some 50 million subscribers (and growing) with a current base corpus of Rs3 lakh crore.  The EPFO has appointed CRISIL for monitoring the performance of the fund managers periodically, who have been allocated funds for this purpose.  
EPFO has SBI, HSBC, Reliance Capital AMC and ICICI Securities PD to invest and SBI was able to provide 9.31% return while HSBC (9.23%), Reliance (9.22%) and ICICI (9.20%) annual yield for the year ending March 2012.  It is possible that EFPO may be now looking for better utilization of the funds and, of course, much better return than what has been achieved so far.
In these circumstances, Mr Sinha’s call that even if a small portion of the fund is diverted to the equity market; it would be a great boost. Such an influx would bring about the much needed flow into the market and to this extent one does not have to depend upon the foreign inflow, which can also go out frequently, destabilising the market. After all, pension and provident funds are here to stay, to help the economy, thus making a sensible contribution.
In the meantime, we need to look at the very purpose of these schemes. When an employee opts for a pension scheme (floated by the company and/or takes additional coverage in any other form) it is meant to take care of the needs when he/she retires.
This issue, then, will take us to the crucial heritage we have in our society. Traditionally, in a family, it is the son who stays back even when he marries and settles down, in a joint family system. His parents may move with him wherever he goes, unless the parent(s) are employed. When this happens, it brings about the first break up in the joint family system as we know.  But then, these are ‘normal’ happenings in a family.
But, what happens when the earning father dies or his home-making mother dies?  If the husband (father) is a government employee, however small it may be, the pension comes to his spouse, who may be at the mercy of her son. What happens if she has no male issues? In a similar fashion, if the ‘retired’ father loses his wife, and is old, and is not “looked after”, the trouble starts.
With the spread of education, foreign exposure, our modern children tend to shirk the responsibility (they need ‘space’ and ‘freedom’) and do their best to send the ageing parent(s) to old peoples’ home. Some of them may even financially support their parents, and will ‘periodically’ keep in ‘touch’. Are these old peoples’ homes good and caring?  Now, that will be yet another story to write.
Why do we need to talk about these, when we are dealing with pension and provident fund utilization? After all these schemes are meant to take care of the people of old age or when the ‘rain’ comes! Exactly. It is just to meet these essential needs and well bearing of old people.
We shall now investigate further the amount of funds diverted for the returns above 9.24% expected by the EPFO. Should we wholeheartedly support the idea of diverting, even if a small portion, to the equity market envisaged by Mr Sinha? At the outset, yes, but with a provision the benchmark annual return is increased more realistically to about 12% or thereabouts, considering the booming and uncontrolled inflationary conditions in the country.
As a trial measure, why not the government authorise the investment in certain selected sectors which needs capital infusion, such as road and railways, power, health services and establishment of agricultural supports in terms of warehousing, cold storage and port developments? The EPFO could also be allowed to play a role as a private equity supplier and fixed deposits earning a guaranteed return over 12% from blue chip companies. These areas need to be seriously looked at avenues for investment since funds are available.
Besides, the EPFO also knows that millions of retired people may be left homeless and uncared for and it also knows that the existing old age homes are few and far between.
Why not take this as a social challenge? The government should appoint an apex body, with offices in all the states of the Union. They should build thousands of homes for these people; these should be compact, neat and functional and these old peoples’ homes should include health services. Such a move would make the construction industry boom; each state should provide the land and essential infrastructural facilities.  

Once such an idea is accepted, provident fund and pension fund rules could be suitably modified to provide the option of a guaranteed admission to old peoples’ homes, should the employee so desire!

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)

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