Pension reforms closer to reality but foreign investors wary

The Lok Sabha approved changes aimed at luring foreign asset managers to run retirement funds, a small victory in government efforts to rescue the economy before elections next year.

Wednesday's vote will slightly loosen rules governing foreign investment in pensions, and is a step towards creating a viable private pension industry to cater to the growing middle class in the world's second most populous nation.

"When the bill is passed, I expect that some more FDI will come in," Finance Minister P. Chidambaram said after the debate, referring to foreign direct investment.

The bill must now go to the Rajya Sabha, where it is expected to get final approval. But foreign firms say the new law is unlikely to immediately trigger the flood of investment the government is looking for to kickstart Asia's third largest economy and help stem a sharp depreciation in the rupee.

The bill links the ceiling on foreign investment in pensions to a related law governing the insurance industry. A revised insurance law in the works would raise the cap to 49 percent from 26 percent in insurance, and therefore pensions, but it is opposed by opposition parties and unlikely to be approved soon.

Even at 49 percent, some fund managers say the current economic crisis means new investors will be slow to step up.

"This is a welcome push for the industry as the bill has a progressive approach, but increasing the FDI cap in the pension sector might not immediately result in a large inflow of foreign capital," said Anil Ghelani, chief investment officer at India's DSP BlackRock Pension Fund Managers Pvt. Ltd, in which U.S.-based BlackRock Inc <BLK.N> is a minority partner.

HIGH-PROFILE EXITS
Foreign firms thronged to India when they were allowed to invest in the insurance and mutual fund industries last decade, but once in place they generally found it difficult to flourish.

In the last two years there have been high profile exits such as ING and New York Life from insurance and Fidelity Investments from the mutual fund industry.

The move for pension sector reform comes a decade after India established an interim regulator to steer the industry. So far, there has been little interest from private players, with just eight asset managers, including Blackrock, operating schemes managing about 300 billion rupees in private sector assets.

This compares with the combined 5 trillion rupees managed by the state-owned provident fund and pension fund and over 7.60 trillion rupees managed by Indian mutual funds.

The push for a more inclusive pension industry is part of Indian financial planners' broader agenda to expand social support and channel domestic savings into the capital markets.

Most of India's half a billion workers still have little or no access to social security and stick to buying gold and real estate instead.

The new law will regulate private asset managers who run retirement funds under a New Pension Scheme (NPS), open to pension contributions even from workers who do not have a stable monthly income.

At present, almost all pension obligations in the country are managed by the state-owned pension fund, which has been criticised for providing measly inflation-adjusted returns and catering for only a fraction of the workforce.

Copyright @ Thomson Reuters 2013