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Our Economic Bureau
New Delhi, Jan 6: The SA Dave committee has favoured the investment of pension funds in equity to maximise returns, creation of a private fund management company and setting up of a pension regulatory authority.
The committee, which is expected to submit its first report in February, has also underlined the need for stepping up the real rate of return on pension to 5 per cent from the present 2.7 per cent after factoring in inflation.
Justifying the need for investing a portion of pension funds in equity, committee chairman SA Dave, while talking to newspersons here on Wednesday, said that world over the long-term return on equity was always found to be good despite volatility in the short run.
He added: "We should not be governed by short-run volatility in the capital market as pensions are long-term funds," and added this would also help in reviving the capital markets.
Dave said that since the pension funds could only give a limited return to the pensioners, one way of increasing returns was to atleast invest a part of the funds in the reputed stocks.
He argued: "We are not asking for investments of the entire pension funds in the equity market, but only for allocating a portion of the resources in the stock market," so as to improve returns on pension funds.
He further said that investment should be permitted only in those equities where "market capitalisation is high, liquidity is high and the impact cost of transactions is low". To begin with, investment might be confined to 50 shares of Nifty or 100 shares of the BSE national index. This number may be gradually increased.
According to Dave, at an appropriate time investment in overseas equity might be allowed for better yield and management of risk. Under this environment, exempt establishments should also be required to engage professional fund managers, registered or accredited by the Sebi, for better management and returns on their exempt funds. This system of funds management by external professionals would also overcome problems ofmisuse of funds by exempt establishments.
There was no justification for taxing yield of more than 12 per cent. In case of funds managed under the 1925 act, there are no such restrictions and institutions like the RBI, IDBI and UTI declare higher returns without any tax obligation on their members. There was a need for unity and harmonisation of this practice. This would also encourage better fund management practices.
At present, pensions are taxed in the hands of receivers. On the other hand, contributions to and interest earned on provident funds are fully exempted from tax. This is a disincentive for contributory pensions and needs to be rectified. There was also a strong justification to tax receipts of accumulated provident funds, Dave said. It is quite equitable and it may be recommended that lumpsum receipts, up to Rs 60,000, may be tax free. Receipts over Rs 60,000, however, should be taxed. An exemption may be permitted if such returns are re-invested in an annuity product of LIC or any otherapproved product. This will also be a disincentive for premature withdrawals from life-long savings for old-age income security.
The return on provident funds during the nineties has been 12 per cent. This can be stepped up through liberalisation of investment guidelines in a prudent manner. "When this is stepped up, the interest earnings may be taxed at the rate of 5 per cent and this amount be transferred to a national senior citizens fund for the purpose of redistribution activities in favour of today's old who are below or near the poverty line. This should apply to all contributory or voluntary provident funds. An amount between Rs 600 crore and Rs 700 crore could be collected annually through this method," he added.
The committee also wants that the coverage of employees' provident fund organisation be extended to all establishments employing more than 10 workers.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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