Sep 2, 2003|
Time to take charge!
In the fortnight when the government has tried to introduce the much-needed reforms in the Indian pension system, we had asked our audience their views regarding the same. In our last week's poll, we had asked our audience whether they would like to invest their pension monies in the stock markets. The result of this poll may not have surprised many. However, we would like to point out that investor preferences might be changing after all.
Our poll indicated that nearly 53% of our respondents are against investing in the stock markets, however a significant 43% did not mind the same. While the number for investing in the stock markets are enthusing, we would like to point out that this may be because of the current bullish trend on the stock markets. However, we cannot rule out the fact that the Indian investor is running out of investment options that offer a normal rate of return (post inflation).
The traditional investment options included PPF (EPF being mandatory), post office savings schemes, fixed deposits, NSS and perhaps bond issues by entities like IDBI or ICICI. In a soft interest rate scenario, investors are finding themselves in a position where returns are declining year after year. For example, fixed deposits are offered at as low as 5.75%, which would have been unthinkable of just a few years ago. On the other hand, administered interest rates are being slowly linked to the market rates, and hence the cut in PPF brought about recently.
The point being that it will just be a while before the government would have to link the administered rates fully to the market and in such a scenario, EPF and PPF would also cease to be attractive investment options. This is where pension reforms comes in. Currently, the government has announced a scheme for central government employees, wherein their pension scheme would change to a defined contribution scheme from the earlier defined returns one. That apart, the government has also proposed the involvement of private fund managers to manage pension funds in the country, apart from an independent regulatory authority to regulate these private entities. In our earlier article we had highlighted the benefits regarding the same for the government.
While currently the process is set in motion, it will be a while before there is more clarity regarding this issue. However one factor is clear. Initially while this scheme will be offered to central government employees, private sector employees too will also have similar options in the future. This reforms process is designed to ensure a gradual exit of the government from the management of pension. For example, there are already talks of dissolving the PPF scheme, so that the new pension system may have enough subscribers. One may also not rule out the possibility of the government exiting the EPF and central pension schemes totally at a latter stage.
While these possibilities may seem a long way away, one must realise that for overall economic betterment of the country, the government needs to remove itself from the administration of pensions as well as refrain from offering administered rates that are putting a strain on the country' fiscal situation. We also need to understand that we are not the only ones to have initiated the pension reforms process. In fact, Latin American countries had initiated this process in the mid 1990s. Any change brings about discomfort in the beginning. However, pension reforms (read: a proper pension system) are a must in the country, where there is no proper social security net for the citizens.
As far as the common man is concerned, he needs to realise that fact that we are looking at a scenario of soft interest rates to come and stay for the long term. The days of guaranteed schemes are over and unsustainable in the long-term. In this scenario, investors need to chart their own investment objectives in order to get returns that are better than the market and factors in inflation as well. Accepting the risk averse nature of the Indian investor (with regards to the stock markets), we would only like to point out this fact that despite the dotcom bust in 2000, US investors have been investing more of their pension monies as compared to 1992. Its time Indians wake up to realities and chart their own future without relying on the government, which increasingly may not be able to do the same for you.
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