For nearly six months, a senior finance ministry official doubled up as India’s pension fund regulator. The UPA government dithered to name a new head even after the selection panel had completed its job.
Now, a full-time member of the Pension Fund Regulatory and Development Authority (PFRDA) is the officiating chairman. Pray, why another interim arrangement by the caretaker government? Acting heads, understandably, will be reluctant to take a decision that a new person may overturn. The new BJP government has the prerogative of appointing a person of its choice to lead the regulatory body, but it would do well to complete the process as long as the selection panel was fair and impartial.
PFRDA, the youngest statutory regulatory body in the financial sector, needs a competent professional with in-depth domain knowledge to steer the sector. Athriving pension sector will help people build a decent retirement nest. It will foster the growth of equity and debt markets, making financing of infrastructure projects much easier.
Typically, both pension funds and insurance companies look for longterm investment avenues, while infrastructure needs long-term funds. Now that the BJP has vowed to spend billions of dollars to build roads, ports and new cities to revive India’s growth, it should also push reforms in insurance and pensions. Insurance, especially life insurance, needs plenty of capital to expand.
The government should not stand in the way if foreign companies are willing to offer more capital. It makes sense to allow foreign investment up to 51% against 26% now, in insurance and pensions, to promote capital inflows. There is no need to panic over majority control to a foreign partner if the companies follow Indian regulations.
Pension funds should also be allowed to invest a slice of their corpus overseas to earn more returns. Investment rules written by regulators must be eased as well for insurers and pension funds. An expert panel steered by former Sebi chairman G N Bajpai is said to have recommended moving away from investment norm by fiat in insurance and pensions to enhance returns for investors.
Why should subscribers to the National Pension System (NPS) be allowed to invest only up to 15% in equities compared to the limit of 50% for voluntary subscribers? The absurd rule must be scrapped. Let civil servants have a say in the allocation of their savings and choice of fund managers.
Also, there is no reason for workers to park their retirement savings with the Employees’ Provident Fund Organisation (EPFO), a lousy fund manager. They must be allowed to voluntarily switch to the NPS and earn better returns. More money will flow into equities, reducing volatility in the stock markets.
The new government should make the Bajpai panel report public and act on its recommendations. But its immediate challenge is to make financial saving products attractive for investors. Equities yield better returns in the long run than an idle asset like gold. What’s missing is proper incentives for distributing financial products. Sales of mutual funds crashed after the capital markets regulator trimmed commissions for agents.
The NPS has also not taken off in a big way due to the poor incentive structure. Neither have inflationindexed bonds been a draw with retail investors. The broken distribution system must be repaired. Professionalising financial regulation will foster innovation. In the US, regulators are usually former market players, and their selection process confirmed by the Senate. So, the right man gets picked for the job, sans partisanship. India can take a page from the US. It should overhaul the selection process for regulators.
Once regulators are selected by the government, the selection should be endorsed by a parliamentary panel, comprising of members of the ruling party and the Opposition. This will ensure full independence of the regulator.
The UPA government rightly chose Raghuram Rajan, an eminent economist, with a sound understanding of the financial markets, to steer the Reserve Bank of India. It was a wise decision. We need many such professionals if India is to bring in holistic and harmonious financial regulation.