Milliman India EB Herald, December 2012

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By Ravi Shekhar, Simon Herborn | 31 December 2012

For frontline managers and individuals managing employee security and benefits in India, Milliman provides updated news and analysis of the latest events and innovations happening in the Indian market. This edition includes information about:

  • Mutual fund and pension product development
  • The Employees' Provident Fund Organisation proposal for permanent PF numbers and enhanced portability
  • Pension fund regulation updates

Mutual funds eye pension products markets

According to this Business Standard article, the Association of Mutual Funds in India (AMFI) has begun seriously considering the implications of entry into the pension products market for mutual funds (MF) firms, setting up a committee to make specific recommendations on an approach.

In India, as in the rest of the world, tax exemptions play a vital role in the “attractiveness” of pension instruments; hence, it would be interesting to see if such new products provide IT exemptions making them at par with other available instruments. Operational issues such as portability and lower fees would only add to the desirability of these new products.

As the pension industry in India develops, alternate products would emerge. This provides employers newer avenues with respect to the retirement benefits they can offer to their employees in lieu of superannuation trusts (provided by insurance companies), as well as avenues for investment for their gratuity and provident fund trusts. It also makes cheaper and more easily available retirement products accessible to the general population.

Starting PF account number may become permanent

A recent article in Live Mint reports changes ahead for provident fund (PF) account numbers and portability. A new plan, proposed by the Employees' Provident Fund Organisation (EPFO), would designate the first PF number employees are assigned at the beginning of their careers as fixed for a lifetime.

One of the biggest bottlenecks in efficient management of EPFO accounts has been a lack of centralisation. One side effect is that, whenever an employee finds a new employer, a new PF account number is issued. In short, the account is not portable. Employees may still choose to transfer money from the old account to the new, but that process is laborious and fraught with numerous bureaucratic hurdles.

In order to overcome this issue, the Labour ministry decided to issue a new “permanent account number” which would have meant a new number for all EPFO-enrolled members. In the recent circular dated 31 August 2012, the Labour ministry proposes instead to simply use the first issued PF as the permanent account number. This would now mean that the PF number issued to an individual in his or her first job will become, in effect, the permanent account number. That employee can quote the same number to all his future employers. For existing employees, this may mean that their current PF numbers would become their permanent PF numbers.

This is a great idea and would be welcomed by most employees. It is now at a proposal stage, and it will be interesting to follow the timeline for implementation.

Pension bill delays take their first victim

A recent Financial Express article, New players fight shy of pension sector, examines the implications of the latest delay in passage of the Pension Fund Regulatory and Development Authority (PFRDA) bill.

The bill, which aims to empower the PFRDA as the regulator of the pension sector, has been stuck in parliament since 2005. The PFRDA has been granted some powers via an ordinance; in 2007, it allowed a few asset management companies to set up pension fund management companies and to manage money from the New Pension System (NPS) in both government and private sectors.

The delay in passage of the pension bill has now taken its first victim: the IDFC pension fund, part of the IDFC financial group, has elected not to renew its license as a pension fund manager. The ongoing lack of clarity in regulation is also a factor that potential new entrants have identified as a factor holding them back.

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