Draft Report of the High Level Group on Services Sector

6.2.4 Pensions reform

Reform in the structure and management of pension funds is a key area of the unfinished reform agenda. Thus far, public sector entities have been invited to manage the pension funds of all new central government employees who have joined employment from January 1, 2004. In this context, it may be mentioned that private sector banks, insurance companies and mutual funds have played an important and positive role in the development and growth of the financial sector. Life insurance companies in India are already playing an important role in the pension sector through group and personal pension products. An appropriate level playing field is therefore recommended. Further, the new pension scheme should be extended expeditiously to unorganized sector employees. Similar reforms should be initiated for the existing government-managed provident funds. Finally, all categories of pension and provident funds should be permitted to diversify their investment portfolios, shifting from the current excessive share of government securities to various categories of corporate debt, securitized paper, and an appropriate proportion of equity investments.¹⁵ Alternate asset classes may also be considered in due course.

The above reforms are essential to achieve desired long-term returns that would provide the required income security to the beneficiaries post-retirement. Unlike the present practice of holding investments to maturity, professional fund management would create active management of portfolios to optimize returns. A diversified mix of assets with varying risk-return profiles would be superior to concentrated portfolios with fixed returns. This has been evidenced across developed and emerging markets. This includes China, which has permitted overseas investments out of its pension funds.