New Delhi, Oct. 27: Players who are allowed entry into the universal pension market being planned by the government will have to have a minimum capitalisation of Rs 100 crore and be willing to hold pension bonds for more than 20 years.
They will have to hold pension bonds floated to fund basic pension schemes till maturity, with low interest rates indexed to the bank rate. Top finance ministry officials said this implies that only large players willing to take risks at low returns will be willing to enter.
“We personally feel only financial companies like HDFC, ICICI, LIC and State Bank of India would be interested. This is not going to be an exciting market like home loans or credit cards. There will be no killings here,” officials said.
However, several private sector insurance players such as ING Vysya, Max New York Life and Allianz Bajaj have already evinced keen interest in the area as they feel it may well develop into one of the deepest in Asia.
The norms for pension players who will be allowed to handle the country’s universal pension scheme which will cover both the organised and unorganised sectors, are currently being finalised by the finance ministry and will be presented to the Group of Ministers on pensions. Pension funds will be allowed to invest in Government of India securities, PSU bonds, rated corporate bonds and indexed equities. The finance ministry is in favour of allowing up to 40 per cent investment in rated corporate securities and indexed equities. However, other ministries including labour have objected to this and want it kept below 20 per cent.
All pension firms 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. They will have to offer a basic fixed income scheme. Moreover, if the company launches 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 and low cost.
In the case of the base scheme, pension players will have to act as a trust responsible for collection, records, investment management and payouts. They will be allowed regulated costs for these purposes.
If they have any cost over-runs on these scores, they will have to absorb it on their own account. This base pension scheme, which is expected to have a monthly contribution of as low as Rs 100, is expected to attract at least 20 million participants in the very initial years, building up within a period of five years a corpus of over Rs 10,000 crore.
Currently, pensions under the Employees Pension Scheme are funded in the sense that employees’ and employers’ contributions are defined but their actuarial relationship to benefits are not clear. Establishments under the exempt category can set up their own trusts which may use actuarial services such as buying annuities to meet their pension payment obligations. These trusts may be merged with the new scheme and separate trusts abolished. Currently, these corporate pension trusts are mostly fully funded based on annuities purchased from the LIC or from UTI’s Retirement Benefit Unit Plan.