Implications of 26% FDI in Pension Sector

January 9, 2012

Recently, the Cabinet has approved changes in the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which will also pave the way for 26% foreign investment in pension fund management companies.

What is PFRDA Bill?

PFRDA was set up as a regulatory body for the pension sector, but the current PFRDA is the Interim PFRDA which means that it is yet to get statutory powers.
The objective of the PFRDA bill is to get it that status. PFRDA Bill was first introduced in Parliament in 2005 and referred to the parliamentary standing committee which submitted its report and recommended that FDI in pension should not be at variance with the insurance sector.
An amendment to the Insurance Bill, which seeks to raise foreign investment cap in domestic private insurance companies to 49 per cent, is also pending. The bill later lapsed in the Parliament with the dissolution of the last Lok Sabha in 2009. Thus, an interim PFRDA has been functioning since 2003 through an executive order, and not by an act. The second statement is also incorrect because there is no legislative backing to the NPS as of now. PFRDA bill is now expected to be taken up for approval in the Winter Session of Parliament.
The cabinet has also decided that there would be no guarantee of assured returns on pension fund schemes.

Is FDI a part of the bill?

No. The FDI limit will not form part of the bill but will be included in the revised regulations.

What are implications?

The foreign companies will be now allowed for 26% FDI in pension fund management companies, similar to the foreign investment norms in the insurance sector. The UPA government has also been trying to raise FDI limit in the insurance sector to 49% from the existing 26% but has met with resistance from Opposition parties.
The move has been pending in Parliament for several years now. The National Pension Scheme, launched in January 2004, has nearly 24 lakh subscribers, mostly those employed by the federal government. Employees Provident Fund Organisation subscribers get 9.5% return on their savings.
The move will open up the pension sector to foreigners. Currently, pension funds of over a million employees in India are managed by domestic players such as IDFC, State Bank of India, Kotak Mahindra Bank, Reliance Capital and insurance major, Life Insurance Corporation of India.

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