General Awareness

April 04, 2017 @ 01:15 PM

FDI in Pension Sector: Modernization of Pension Sector

General awareness on current topics is essential as not only you will be getting questions on   GK in various MBA entrance exams but it will be useful for Essay writing test and WAT also.

Today, you will read General Awareness Topic  : FDI in Pension Sector: Modernization of Pension Sector

Pension reforms were initiated in 2004 as a first step towards the modernization of pension sector, when New Pension Scheme (NPS) was launched. NPS was made mandatory for all employees, except the Armed Forces, who have entered into service on or after 1 January 2004.
 
However, with effect from 1 May 2009, the NPS has been opened to all citizens of the country, which, again, has been welcomed by all. All central government employees who joined from 2004 have to mandatorily contribute 10percent of their salary and the government contributes an equal amount. Initially meant for government employees, it is eventually to be extended to the private sector and self-employed and informal workers too.
 
 Investors in NPS reap returns based on the success of the scheme's investment performance. Though NPS may invest in equities too to lift returns, it does offer a varied menu of options to employees who want to opt for low or nil equity in their retirement portfolio. 
 
The NPS is designed to have fund managers from both the public and private sectors, selected on the basis of competitive bidding. They will disclose their performance at annual intervals and investors will enjoy flexibility to shift between schemes and managers, based on this. The pension regulator PFRDA is to oversee the NPS and set the terms and conditions for it.
 
The new system promises transparent selection of managers, planned asset allocation and regular disclosures. These may help investors see exactly where their pension contributions are going. Given the flexibility to switch between managers, competition may deliver good performance too. After all, in a pension fund, beating inflation through a healthy return is much more important than state guarantees. Though different players consider the new system to be better and more sustainable than its parent scheme, new entrants into the sector seems reluctant to join the NPS.  
 
Thus, the overhauling the pension system becomes essential because India's pension schemes are not delivering the expected benefits in the first place. Apart from this, India's economic growth rate was around 5.5 percent in the last two quarters, a much less from the near double-digit rate of recent years. Global credit rating agencies have warned India could lose its investment grade rating because of unsustainable budget and current account deficits. The latest decision was induced by this fact as well.
 
As a second step to reform the sector, government passed the Pension Fund Regulatory and Development Authority Bill whereby it opened the pension sector to foreign investment. Against the expected cap of 29 percent, the Cabinet cleared up to 49 per cent foreign investment in the sector.  The Bill further proposes to permit subscribers to withdrawal up to 25 percent of the contribution in case of an emergency.
 
The inclusion of foreign investment in the pension sector will bring new entrants into the field and will infuse competition among the pension fund managers. On one hand, competition will provide new choices to the consumers; new players will bring innovations and other techniques. The pension sector is in nascent stages in the rural areas. With FDI being allowed, it is expected to provide life-time earnings for people in rural areas as well.
 
As per the 12th Draft Approach paper of the Planning Commission The total investment in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion during the 12th Plan period. Such high level of investments cannot be financed by traditional sources of public finance alone. Moreover, with increased globalization, provisions will have to be made to counter any global risks that might be prevailing as is the case with Euro zone crises currently. 
 
In the light of such events therefore the Central Government might have to pursue an even more cautious approach while incurring expenditures. This could lead to a significant infrastructure gap and therefore there is need to recognize the importance of private sector’s role in developing the infrastructure requirements of the nation. 
 
However amidst a slowing economy and a fall in corporate performance there might be a situation wherein even the private sector might have monetary constraints to fund huge infrastructure projects. In order to fill this infrastructure gap, pension fund investments into infrastructure seem to be a befitting alternative given the match of interests for both the sectors. 
 
FDI in pension funds would further increase the volume of assets that can be invested into infrastructure and help in realizing the infrastructure needs of the country.
 
These reforms helped drive up India's markets in recent weeks, and the latest moves added to the positive sentiment and could boost interest in a forthcoming sale of shares in state-owned companies. It is a signal of rationalizing the banking, financial services and insurance sector, and is a welcome development. It will induce more confidence in India's economy and improve the investment climate.
    
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