The long-drawn debate on pension reforms is settled. But with a dissenting note from the labour minister. Even as Sahib Singh Verma punched holes in the new pension policy, the Union Cabinet cleared it late last month, opening up the sector to private players. This puts an end to three years of deliberations on the issue following the Old Age Social and Income Security (oasis) report published in January 2000. The aim of the new scheme will be three-fold: restrict the looming financial crisis for the government-funded pension plans, provide unorganised and private-sector retirees an opportunity to get regular income and help raise long-term funds for infrastructure projects. Beyond this, for the first time individuals will actively manage their retirement kitty.

EVERYONE'S INVITED: Joining a pension plan will be as easy as opening a bank account

Verma, who has for long lobbied for workers' interests besides opposing interest rate cuts on provident funds, says, "Leaving pension funds entirely in the hands of private fund management companies will always carry risk." Except for him and the government employees, who are set to lose the benefit of the generous government-funded pension, the mood is clearly upbeat. For the cash-strapped Government, the new scheme offers an opportunity to rein in the growing pension liability-pegged at Rs 22,410 crore for the Central Government (in 2001-2) and Rs 23,820 crore for state governments (in 2000-1). For the workers who are not government employees, the new scheme offers the first-ever opportunity to have a world-class pension plan. Says Gautam Bhardwaj, director, Invest India Economic Foundation: "This is one of the quietest but most significant reform measures that the Government has undertaken." Adds Major-General (retd) Inderjit Singh Dhillon, director-general, Helpage India: "This will help Indians save for their retirement and age with dignity."

With the scheme expected to be in place by early next year, working Indians will be able to open an individual retirement account (IRA), just like a savings account, at a bank or a post office. For the new Central government employees (effective date yet to be decided) it will be mandatory and will replace the Government Provident Fund. For others, the scheme will be voluntary and will continue alongside the existing Provident Fund. It will be a big change for government employees from a salary-linked pension-50 per cent of the last drawn salary-to a pension that will depend on the accrued savings in their retirement account. Even though the scheme is not mandated for state government employees, they are expected to join it soon. The Andhra Pradesh Government has already taken the lead by making it compulsory for all employees recruited after October 1, 2002, to join the pension scheme.

SPLIT VIEWS

"It's risky to leave pension entirely in private hands." Sahib Singh Verma, labour minister

"Funds should not focus on short-term gains." U.K. Sinha, JT Secy, Finance Ministry

"This is one of the quietest reform measures." Gautam Bhardwaj, director, IIEF

FINE PRINT

> Three schemes-safe, balanced and growth-will be offered. For the undecided, safe will be the default option. > A person can freely shift from one scheme to another or from one company to another. > Like mutual funds, net asset value of pension schemes will be declared on a daily basis. > A SEBI-like regulator and a record keeper will track all the transactions. Contributions up to a limit to be tax exempt. Withdrawals will be taxable. > The scheme is mandatory for Central government employees but voluntary for others.

An individual will have one retirement account number for life, irrespective of his job status. He will be allowed two pension accounts-a normal tier-I account which bars withdrawals and the other tier-II account which will permit it. There will, however, be no tax benefits in the withdrawable account. At 60 years or above when the employee exits the scheme, 40 per cent of the accumulated amount will have to be used to buy an annuity from a life insurance company. Remaining 60 per cent would be available to the retiree as a lump sum. In case an individual opts out of the pension system before he is 60, the annuitisation will have to be 80 per cent of the accumulation. While pension contribution up to a limit (to be decided) will not be taxed, withdrawal will be. Tax exemption will be available for up to 42 years of contributions to the pension scheme.

Also, for the first time, the Government will ease norms to allow investment of pension funds in the stock market. "The global experience is loud and clear that returns on equity over a long period have always been higher," says Ajay Shah, consultant, Department of Economic Affairs, Ministry of Finance. Depending on their equity exposure, there will be three kinds of schemes-safe, balanced and growth (see table).

The net asset value (NAV) of each scheme can be monitored on a daily basis and if desired individuals can move from one scheme or fund to another almost immediately. "Our effort has been to make the schemes simple with easy, transparent procedures so that the investor does not get confused," says U.K. Sinha, joint secretary, Ministry of Finance. He adds that the Government does not want any exit load for switching from one company to another.

Predictably, fund management companies are excited. Global players, including the Principal Financial Group, the Barclays Global Investors, the Vanguard Group (with $550 billion assets) and the State Street Corporation (with assets worth over $8.5 trillion), are lining up. Major mutual fund and insurance companies like the Franklin Templeton Investments, the DSP Merrill Lynch, the HDFC Mutual Fund and the ICICI Prudential Insurance Company have also evinced interest. Says Milind Barve, managing director, HDFC Mutual Fund: "The market will be small in the beginning but we see a great business opportunity in pension." Selection criteria for the pension fund management companies will be stringent. Their track record, reach, global expertise will be important. "Low administrative costs and minimal cost structures will be important in their selection," says Sinha.

To oversee and regulate asset management companies, the Government is setting up a Pension Fund Regulatory and Development Authority (PFDRA) on the lines of the SEBI and IRDA. At the back-end there will be a Central record keeping and accounting (CRA) agency on the lines of the NSDL, directly controlled by the regulator.

The move has been cheered by the infrastructure sector. Says Vinayak Chatterjee, chairman, Feedback Ventures: "It will help us rectify our asset/liability mismatch." Having long gestation period, infrastructure projects globally are financed by pension and insurance funds.

The move was long overdue. Pension liability apart, changing demographics in India is likely to become a serious issue in the future. Life expectancy has increased substantially in the past two decades-from 54 years in 1980 to 63 in 2002. Population of 60 plus is also growing faster-between 1991 and 2016, while the growth in the total population is projected to be 49 per cent, that of the elderly people is pegged at 107 per cent. Amid the enthusiasm, Verma has a word of caution: "Mis-selling by private funds and mismanagement of pension funds are serious issues that ought to be addressed." In Chile, which has a similar model, aggressive private pension fund management companies pushed up administrative cost to 23 per cent while wooing investors. Verma suggests a minimum guaranteed return to avoid any crisis. Even as countries like Germany, Italy and Argentina are moving away from guaranteed pension schemes, Sinha says, "We will do whatever is required to have a robust and world-class pension system here."

Sinha, or for that matter the Government, should know that pension is a sensitive issue. Losing one's savings when young is a dream gone sour. Losing it when one is old means a life that's virtually over even before it has ended.