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TIME TO RETHINK

Applications have closed for the chairmanship of the Pension Fund Regulatory and Development Authority. The job is not unattractive; although the chairman would have to find his own accommodation and transport, he should be comfortably off on the promised emoluments of Rs 4½ lakh a month. It is particularly well suited for a middle-level government official who is stagnating in one of the eighty-odd Central ministries. The post was held by a joint secretary for years; then he resigned on some flimsy ground such as not being selected for some selection panel. The rewards of secondment were not sufficiently attractive. The position should be a cosy one for a neglected civil servant to park himself in for a few years. Apart from the pay, which is not unattractive, the workload is unlikely to be excessive; the said chairman, supported by ample staff, would have not more than a dozen pension funds to regulate. But there does not seem to be much demand for the job. One of its disadvantages, paradoxically, may be the workload: the authority has few funds to oversee, which presumably means meager opportunities for exercising influence on appointments, transfers and the like.

Although it brims with youth, India has a growing population of middle-aged people progressing towards old age. So it is surprising that it has so few pension funds. The reason must lie in the unattractiveness of pension funds, which in turn must have something to do with the regulations they are subjected to. The problems they create are typified by the employees’ pension fund organization. It does not lack business, for all the 80-million-off employees and their employers are forced to put their money into employee pension funds. But the employees tend to withdraw prematurely as much of their investment in the pension funds as possible; the returns on pension fund investments are not attractive enough. Last month, the labour ministry relaxed some of its investment regulations. But this creeping liberalization does not satisfy everyone.

The chairman of the Securities and Exchange Board of India has expressed the opinion that pension funds should be allowed to invest in equity. His views will scandalize some people, but it is true that the average long-term rate of return on equity is higher than on debt, the difference being due to its greater riskiness. A pension fund regulator will ask himself what selection of equity should qualify for pension funds, and whether there should be any rules regarding the tenure of investment. The point is that no government can keep itself from making complicated rules to govern pension funds, and that those rules are bound to put off investors who want simplicity and flexibility. One solution would be to allow investment of pension savings in all mutual funds without restrictions, and to confine their rules to the tenure. It is high time to rethink the rules anyway.