The head of the Employees' Provident Fund Organisation (EPFO) says it has "no option" but to change its rules and put money into riskier investments by buying stocks for the first time to seek higher returns.
K.K. Jalan, chief of the EPFO, said that to get better returns, the fund with about $125 billion in assets needs to diversify investments, the bulk of which are in government debt.
"The way our fund size is increasing, and the way it is bound to increase, there is no other option," Jalan told Reuters in an interview.
Prime Minister Narendra Modi's government also wants the 80 million-member EPFO, the world's ninth largest by assets in 2012, to invest in stocks, which could support buoyant Indian markets.
The Nifty has been a star performer so far in 2014, rising more than 26 percent.
But EPFO's 43-member investment committee has blocked share-purchases. Last month, it rejected a finance ministry proposal to invest at least 5 percent of assets in stocks, saying this would expose workers' savings to volatility.
Jalan did not say how he planned to overcome the opposition, but said change was inevitable at a time of bond yields are down due to lower inflation.
"If you do not have a debt market, what will you do?" he said. "It is just a matter of time ... before we consider other options."
The fund now invests nearly 70 per cent of its annual accruals of about Rs 70,000 crore ($11.5 billion) in central and state government bonds, through the State Bank of India, ICICI Securities, HSBC and Reliance Capital as its portfolio managers.
It invests about 5 per cent of its assets in AAA-rated corporate debt and a quarter in paper issued by state-run companies.
EPFO, funded by payroll contributions, holds 69 per cent of its assets in its provident fund. Another 29 per cent is invested in its $33 billion pension fund and the rest in a life insurance fund.
In the past year, EPFO has seen a decline in returns of about one percentage point. In the fiscal year ended in March, EPFO declared a return of 8.75 per cent to members. By comparison, the giant California State Teachers' Retirement System, the second-largest U.S. pension fund, in the 2013-2014 fiscal year had an 18.7 percent return.
Adding to pressure on the Indian fund to reform and perform better, Modi has promised to increase social security benefits for employees and to set a minimum pension of Rs 1,000 a month ($16). Current pensions can be as low as $3 a month.
Modi's government, elected in May, has made it compulsory for companies and workers earning up to Rs 15,000 a month to contribute to the fund - which could add five million members.
Even before a surge, poor past record-keeping means EPFO is having a hard time tracking people entitled to payments, according to Jalan.
He said EPFO did not have an adequate database of beneficiaries, raising worries about the level of its future liabilities.
"It is a serious issue. Data should be correct even to a single person," he said adding the pension fund faced a deficit of $1.6 billion in 2012/13, but that with enrolment of new members the situation would improve.
Membership expansion would increase EPFO's annual accruals by 25-30 percent to nearly Rs 1 trillion, said Jalan.
An internal report last year recommended that either the government make a one-off contribution of Rs 41,100 crore or raise the retirement age for employees to start getting benefits.
Jalan, who did not comment on the report, said 35 million people were contributing to the pension programme but up to 80 million could be eligible to draw from it.
Meanwhile, PTI reported Jalan denying any plans to invest in stock markets.
"We are not considering any proposal to invest in stock markets or equity at present," Jalan told PTI.
He said this in response to media reports that EPFO has no alternative but to change its investment norms to invest in equity markets.