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Guardian for pension funds proposed
- Finance secretary S. Narayan frontrunner in race to head the watchdog

New Delhi, April 26: The government plans to set up an independent Pension Regulatory Development Authority (PRDA) on the lines of the IRDA and will introduce a legislation to give shape to it soon.

The regulatory authority, which is expected to be initially a three-member body, will supervise functioning and growth of India’s yet to be opened up pension sector.

Finance secretary S. Narayan who is retiring shortly is said to be the frontrunner in the race to head it. The earlier thinking in the finance ministry was that IRDA should be given control over pension funds and this view had the support of both former finance minister Yashwant Sinha and Planning Commission deputy chairman K.C. Pant who heads the group of ministers on pensions.

But finance minister Jaswant Singh seems to have decided in favour of setting up an independent body. The new body will have powers to issue licence, register and supervise pension funds.

It will prescribe investment guidelines, accounting standards and disclosure norms or fund managers. It will also fix and review fees charged by various players to schedule determination of these fees to prevent the start up costs from getting embedded in the system permanently.

The PRDA will also act as a policing authority against fund frauds and as a judicial authority in resolving disputes and redressing investor grievances.

The new regulator will also be charged with the implementation of relative return guarantees, including risk management to ensure adequacy of collateral. It will also standardise reports on pension flows, patterns of investments, pay-outs and expenses to ensure investors are kept in the know on the health of the fund concerned.

The PRDA will also set standards for responses to customer queries and time taken for claim settlement.

The ministry has also decided that pension players who are allowed entry into the universal pension market being planned by the Centre must have a minimum capitalisation of Rs 100 crore and be ready to hold pension bonds for periods upwards of 20 years.

Players will have to hold pension bonds floated to fund basic pension schemes till maturity with low interest rates indexed to the bank rate which is currently at 6.25 per cent.

Top finance ministry officials said this implies that only large players players willing to take risks at low returns levels will be willing to enter.

Pension funds will be allowed to invest in Government of India securities, PSU bonds, rated corporate bonds and indexed equities. While the finance ministry is in favour of allowing up to 40 per cent investment in rated corporate securities and indexed equities, other ministries, including labour, have objected to this and have wanted this to be kept below 20 per cent.

All pension players will participate in a well regulated inter-player market which will provide some sort of liquidity to the bonds as well as provide loans against balances held by beneficiaries for certain specified purposes.

Players will have to offer a basic fixed income scheme. If they launch separate pension schemes, each will have to be separately managed.

The government will work out a separate system of cross-subsidisation between various schemes and players so as to make the basic scheme for poorer section attractive.

In case of the base scheme, pension players will have to act as trusts responsible for collection, records, investment management and pay-outs. They will be allowed regulated costs for these purposes.

Ministry officials said the government has also decided to go ahead with a pay-as-you-go pension fund for civil servants instead of the current pension scheme which combines a dearness allowance tag along with it.

The new “funded system”, which calls for contribution from employees, is being brought in to restrict pension liability to Rs 29,500 crore by 2009-10 or half per cent of the GDP. It is currently nearly 1 per cent of the GDP.

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