Indian Pension Fund- Is it really one?

In India there is an Employee Pension Fund, in which both employee and employer contribute some money periodically, so that by the retirement the money gets pooled up. Then after retirement this money can be withdrawn providing a retirement income to the people in their old age. The money that is collected is invested for the time being so as to generate some further income.

The big question that comes is that is it really worth at the end of the day. Recently a study was conducted to ascertain the efficiency of such fund. The report came out with the conclusion that the worst investment one can have is in the Indian Pension fund. The interest that the funds get after their investment returns is not even able to cover the ongoing inflation rate. It means that you just pool in the money and at the end of the day you can’t even buy your basic requirements.

The basic reason behind it was that the venues where these funds are invested. It was found that the funds are invested in government securities, Public Banks bonds and Public sector enterprises etc. who itself are struggling to gain profits. Due to this the returns on the invested pension funds is abysmally low. The interest they provide is about 7-8% and the inflation rate is around 9-10%. That means you are getting a negative real return of (-1)-(-2%).

The second problem is that the fund manager who manages all these investments are selected by the government on the basis of bidding, the company who bids the lowest gets the contract and not on the basis of performance.

Finally government got little enlightened and introduced the New Pension Scheme. Under this scheme the funds are invested in stock markets and thus provide an inflation beating returns. The person also has a choice of selecting the fund manager out of the selected group of managers by government.

But there are also certain problems with this. The managers are selected by the government first and can be removed any time by the government. This might raise issues as it might affect the investments of certain people which were being handled by them.

The best solution will be to allow the person himself choose his fund manager and let him pay a certain share of his profits to him. Thus government should only play a role of facilitator and allow the markets to take over the funds. It will ensure better returns to people. The competition between the various fund managers will automatically kick out the bad players.    

Akshay Ratnawat