No assured returns to pension subscribers

The Union Cabinet on Wednesday agreed to partially open the gates to foreign direct investment (FDI) in the pension sector to the extent of 26 per cent, as is now available in the area of insurance, but decided not to mention any sectoral cap in the proposed legislation.

In its approval to amendments in the PFRDA Bill, 2011, the Cabinet, however, turned down the Parliamentary Standing Committee's suggestion of providing a guarantee on assured returns on pension fund schemes.

The provision with regard to the FDI cap for the pension sector is proposed to be incorporated in the regulations once the Pension Fund Regulatory and Development Authority Bill, 2011, is enacted.

Cap on a par with insurance sector

Explaining the need for the options kept open, an official spokesperson said: “The government is of the view that the FDI cap in the pension (sector) should be at 26 per cent, on a par with the insurance sector. However, it would like to retain the flexibility of changing the cap of FDI as and when required and that is why it has not been kept as part of the bill.”

With the Cabinet's approval of some of the amendments proposed, the PFRDA Bill, which seeks to open the pension sector to private sector and foreign investment, will now be taken up for consideration and passage in the winter session of Parliament beginning November 22.

Panel suggestions

The proposed legislation introduced in the Lok Sabha on March 24 this year was subsequently referred to the Standing Committee chaired by BJP leader and former Finance Minister Yashwant Sinha for scrutiny. In its suggestions, the committee had wanted the government not only to specify the FDI cap in the legislation itself but also provide for a minimum guaranteed return to pension subscribers.

While rejecting these proposed provisions, the Cabinet also turned down the committee's suggestion on providing greater flexibility to subscribers on withdrawal of funds from their accounts.

Essentially, the PFRDA Bill provides for the setting up of a statutory authority to undertake promotional, developmental and regulatory functions with regard to pension funds.

As to why the government has decided not to mention the FDI cap in the legislation is the fact that it has not been able to raise the FDI ceiling in insurance from the existing 26 per cent to 49 per cent as the changes require fresh amendments. As a result, the Insurance (Amendment) Bill has been pending approval since 2008.

On the other hand, once the FDI caps are mentioned in the regulations, the government would find it easier to modify the ceilings through an executive order, as and when required.

As for the issue of withdrawal, the spokesperson said that the flexibility of withdrawals from funds under the pension scheme would be tightened. “It would be allowed only in case of genuine needs...It would be considered when the need is critical.

It will not be allowed for frivolous reasons,” the spokesperson added.