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First steps in reforming your pension

For too long now, the pension sector has been a woefully neglected stepchild for everyone—government, regulators and investors. Now, hopefully, the first step towards pension reforms has been taken.

     Print Edition: Aug 21, 2008

Word’s worth

Y V Reddy
“Barring any further shocks, inflation will be at the current levels till the first half of third quarter. By fourth, we can bring it to 7%”
— Y V Reddy, RBI Governor

“So far, real estate prices have not fallen as the rise in steel and cement prices have added to the cost. But we are expecting a 10-15% fall”
—Renu Sud Karnad, Joint MD, HDFC Bank

“The shift to FMPs and liquid funds from income funds is obvious given the uncertainty over long-term interest rates”
—Ramanathan K, Head, Equities, ING Vyasya Mutual Fund

“Commodities have a strong correlation with inflation and are also good for portfolio diversification”
—Vineet K Vohra, MD and CEO, ING Investment Management India

Source: Business Line and The Economic Times

For too long now, the pension sector has been a woefully neglected stepchild for everyone—government, regulators and investors. Now, hopefully, the first step towards pension reforms has been taken. The government has decided to allow three private fund managers to compete with the State Bank of India (SBI) in handling the funds of the Employees’ Provident Fund Organisation (EPFO). The asset management companies of HSBC, ICICI Prudential and Reliance Capital will come in to manage the Rs 1,50,000 crore in the EPFO kitty, that had so far been managed only by the public-sector SBI. The economic and political ramifications can be argued in other forums; what’s important is its implications for you.

The most obvious impact is likely to be felt by the EPFO itself and not by the 15 million investors. The organisation will save Rs 2 crore every year in investment management fees. Reliance and SBI will get an investment management fee of 0.01% (that’s 10 paisa for every Rs 1,000 managed), while ICICI and HSBC will get 7.5 paisa and 6.3 paisa, respectively, for every Rs 1,000 managed by them. The fund houses are more than happy to get this fee for a chance to manage Rs 27,000-30,000 crore, estimated to be EPFO’s annual incremental assets. In fact, when bids were invited from asset management companies, two indicated their willingness to manage the fund without a fee.

Given that the four asset management companies will be vying for the same business, it’s a given that they will deploy the money efficiently and get better realisations. In simple terms, it means better returns. While the returns might not see a significant growth immediately, the fund managers could pave the way for the EPFO money to be invested in the equity market. This will bring more stability to the stock markets as the EPFO money stays for the long term and there is a regular annual inflow.

Increased transparency of operations and a greater degree of accountability are other positives. But does all this also mean a significant improvement in service for the small investor? Given that the service is deplorable at the moment, even a minor improvement will be welcome. However, better service standards can only be set when the private fund managers are allowed to deal with account-holders. Under the present guidelines, this is not possible. Experts hope that this will happen once the pension bill, pending in Parliament, goes through. For the present, it is enough that the first baby steps towards reforms have been taken. If all goes well and the pension sector finally gets due recognition, millions of employees in the country stand to benefit.

—Narayan Krishnamurthy

Free terror cover

Telling figures

Numbers speak louder than words. Money Today highlights some figures that have immediate or long-term personal finance implications

6.7% is the real rate of return in equities since 1990 and is about the same as India’s real GDP growth rate

440.5 million dollars is the money remitted by NRIs in 2007-8, according to RBI

5,149 crore rupees is the net investment by mutual funds in debt in July this year, a 50% rise over June

10 lakh is the number of e-returns filed by 29 July this year.The figure was expected to cross the 13 lakh mark by 31 July, compared with 1.6 lakh e-returns filed in the same period last year

With the number of terror strikes going up across the country, an insurance policy offering cover against such acts has become imperative—and the insurance sector is finally waking up to its potential.

While a structured product is still awaited, a beginning has been made. The Optima Insurance Brokers has launched a life insurance policy offering terrorism coverage. The policy comes free of cost and provides Rs 1 lakh to the policyholder’s family in the event of his death in a domestic terrorist attack. However, the policy is only available for the first 1 lakh applicants, and it excludes the residents of Jammu and Kashmir and the North-east. The procedure of getting the policy is simple: log on to the company’s portal, www.click2insure.in and fill in some personal details.

Once the company processes the information, the policy will be dispatched. It’s valid only for a year, but the company is in talks with the existing insurer, The New India Assurance, for a renewal option. Says Rahul Aggarwal, CEO, Optima Insurance Brokers: “Most often the compensation doled out by the government to the victim’s family is inadequate. Though the insurance amount provided by this policy will not take care of all financial needs of a family, it will help them to a certain extent.”

— Priya Kapoor

The lesser evil

Best FD interest rates
BankInterest rateTenure
ABN Amro Bank10.25%400 days
Tamil Mercantile Bank10%400 days
Kotak Bank9.75%
>1 yr but less than 2 yrs
Senior citizens will get an additional 0.25%; list is illustrative

After its July 29 credit policy announcement, RBI seems to be the villain out to drain your money. In fact, after the announcement, the BSE Sensex fell by more than 500 points, and the banking index lost over 5%. Despite these negatives, the central bank is working to your benefit. By increasing the repo rate and the CRR by 0.5 and 0.25 percentage points, respectively, it hopes to control the single biggest threat to personal finances—inflation. Through these measures, RBI aims to bring down inflation to 7% by March 2009. That is not to say that you won’t feel the pinch in the immediate future. Stocks from more rate-sensitive sectors such as real estate, banks and capital goods, which had posted a tentative recovery in the run-up to the credit policy announcement, may face a setback. “With capital becoming dearer, we also expect it to impact corporate profitability as a whole because most sectors and companies have embarked on huge capacity expansion plans,” says Hitesh Agrawal, head of research, Angel Broking.

Worse, many analysts believe the investors should be prepared for another round of hikes in deposit and lending rates considering the higher borrowing costs for banks and the pressure on liquidity. Also, RBI may have to further tighten the screws in the near future. A lot will depend on crude oil prices, which have thankfully begun to fall. The bad news is that its spill-over advantages may be negated if government expenditure goes up sharply, as it is wont to in election season. But if the government can curtail expenditure and inflation is back in the 5-7% range, RBI will be able to relax its vigil and interest rates will come down.

— Tanvi Varma

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