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Freedom in the nest eggs

Freedom in the nest eggs
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First Published: Wed, Aug 13 2008. 12 04 AM IST
Updated: Wed, Aug 13 2008. 12 04 AM IST
Dragging India’s pension system into the modern age has been a tough battle — and one where the reformers have not had too many victories. There has been far more talk than action on pension reforms through the current decade.
But there are some early signs right now that the tide is turning. State Bank of India (SBI) had a monopoly right to manage the Rs2.5 trillion with the Employees’ Provident Fund Organisation (EPFO), which controls 80% of pension money in India. Late last month, three private asset management companies and SBI offered to manage this mountain at wafer-thin rates. The fund managers were chosen through an auction. There is also talk that SBI’s other monopoly — as banker to the provident fund body — could go. And Mint reported in its Tuesday edition that private pension funds would soon have greater freedom to invest their corpus in select equities and debt issued by multilateral agencies.
These are welcome signs that the government is finally getting serious about pension reforms; and high time, too. The benefits of an efficient pension system are twofold. It will offer better social security to workers when they retire. And it will help grow a long-term bond market that is essential for private infrastructure developers.
While any progress as far as private pension funds and the government’s new pension scheme is welcome, the acid test will be what happens to EPFO. It has been a bulwark against reforms and is controlled by the Left.
The decision to give private companies the right to manage EPFO’s fund was not unanimously agreed to in its board meeting. Yet, the decision was pushed through. We hope more reforms are also pursued with the help of simple majorities in EPFO board meetings.
The ultimate issue is the freedom to choose. Mandatory contributions to provident fund schemes are fine. Many countries do that to ensure that people are not left with too little money when they retire. But Indians need freedom to choose how their retirement savings are invested and who will do the investing. That will require radical change at EPFO. We hope this happens sooner rather than later.
Are pension reforms on track? Write to us at views@livemint.com
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First Published: Wed, Aug 13 2008. 12 04 AM IST