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Centre to offer a 15% equity option

Centre to offer a 15% equity option
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First Published: Wed, Mar 21 2007. 12 18 AM IST
Updated: Wed, Mar 21 2007. 12 18 AM IST
The government is jumpstarting its New Pension Scheme by giving its employees an option, for the first time, to invest up to 15% of their funds in equities and mutual funds.
More conservative investors will continue to have the option of investing only in government securities, which are less risky but also typically generate lower returns.
Initially, the options will be restricted to Central and state government employees who joined on or after 1 January 2004.
The current changes are interim until Parliament passes the pending Bill on pension-fund reforms. Then the norms will become available to private sector employees too.
The decision to allow more aggressive investment options has been prompted by the desire to offer potentially higher returns to those putting their money into the government plan. Funds in the system are currently parked in the Public Account, on which the government pays 8% annual interest.
The government automatically deducts a portion of the monthly salary to put into the pension fund.
The option of up to 15% equity investment will be split into two parts, said D. Swarup, chairman of the sector’s regulator Pension Fund Regulatory and Development Authority. Up to 5% can be invested in shares and the balance can be moved into equity linked saving schemes offered by the mutual fund industry.
The pension-fund scheme’s operations will be started in a truncated fashion as initially it will extend only to five lakh Central and state government employees.
In the second phase, after Parliament approves the reforms, employees from other sectors, including the unorganized sector, too, will be able to subscribe to it.
The regulator believes starting with just government employees makes sense so the authority can deal with any teething troubles.
“We’ll be able to list and validate the system... in a way it’s good we’re starting on a smaller scale,” said Swarup.
Initially, the scheme will be run by state-owned companies. The authority has shortlisted four state-owned companies to pick one record keeper of subscribers, the Central Recordkeeping Agency.
It will also shortly start the hunt for two or three state-owned pension fund managers to manage the corpus of the government-employee subscribers, who are growing at the rate of one lakh a year.
The primary criterion to select a pension-fund manager would be the commission rate charged for managing the funds. The lower the commission rate, the better an applicant’s chances of getting picked.
Internationally, pension fund managers do not charge more than 0.5-3% to manage such funds.
Pension funds won’t have to bear marketing costs of the kind mutual funds do, noted Dhirendra Kumar, CEO of Value Research, a Delhi-based, independent provider of investment information.
Mutual funds can charge a maximum of 2.25% of the assets under management in the case of equity schemes and 1.75% in the case of debt schemes.
Kumar said a ceiling between 1% and 2% of assets under management in the case of pension funds would seem desirable.
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First Published: Wed, Mar 21 2007. 12 18 AM IST
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