Lok Sabha has done well to pass a much-needed legislation to give legal backing to the regulator of pensions and usher in more reforms in how pension schemes are run in India.
The government should take steps forthwith to allow workers currently trapped in the low-return world of the Employees' Provident Fund (EPF) to migrate, on a purely voluntary basis, to the National Pension System (NPS) overseen by the Pension Fund Regulatory and Development Authority (PFRDA). It must mandate the employers of such migrants to the NPS to switch their contribution from the EPF to the scheme as well.
The NPS allows a member to choose her fund manager and allocation across asset classes. The government should also remove the discriminatory tax treatment of the NPS, which is to be taxed at maturity, and harmonise the tax treatment of all long-term savings schemes. NPS needs to be marketed better too, with higher distributor incentives.
The bipartisan cooperation that allowed the pension Bill to be passed is also needed to raise the foreign direct investment (FDI) cap in the insurance sector to bring in more investment and dollars. The FDI cap in the pension sector has been set on par with that in insurance. Better technology and managerial expertise will foster a vibrant insurance and pensions market that can also mobilise long-term resources for investment in infrastructure.
The NPS, which manages the pensions of the Centre's civil servants who joined service from January 2004, and for which 27 states have signed up entirely of their own volition, has the institutional capacity to generate superior returns. It is open to voluntary subscribers as well. Legal backing will give the regulator punitive powers on par with other financial sector regulators.
The government has had to accommodate some Opposition recommendations on assured returns and flexible withdrawals. The assured return must be based on investment exclusively in sovereign debt and must not be guaranteed using any other public money. The PFRDA should come out with the rules quickly.
Source : The Economic Times ( Editorial ), 6 Sept., 2013
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