Govt relaxes pension fund investments norms to boost returns

05 Dec 2013 Evaluate

In a bid to boost returns on pension funds and to develop the domestic bond markets, the government has eased the pension fund investments norms. The move will allow a portion of the country`s $80 billion in employee pensions to be invested in a wider array of debt. Marking the first overhaul of investment rules in a decade, Labour Ministry’s new rules will give more flexibility for Fund managers handling money on behalf of the Employees’ Provident Fund Organisation (EPFO) to invest in a range of financial instruments including corporate bonds. Further the relaxed rules will also let pension fund managers decide on strategic asset allocation and ranges, further it is expected to increase returns by 10 to 20 percent annually on the investments. Meanwhile, EPFO board will approve the changes in Labour Ministry new rules before they become official.

As per the new guidelines, the government will allow up to 5 percent of total pension funds to be invested in money markets, including treasury bills. It will also relax rules on corporate bond investments, allowing up to 55 percent of pension funds to be invested in debt issues by companies, banks and state-run financial firms, as against present 30 percent of funds in debt of these companies. Furthermore, the government will also allow up to 55 percent of the pension funds to be invested in a newly merged category comprising government and state bonds. Currently, managers have to deploy 25 percent of EPFO funds into government bonds and 15 percent into state bonds. Meanwhile, the government has not yet allowed the pension funds to be invested in equities due to high risk.

Currently, the EPFO oversees the pensions of around 85 million public and private sector employees across India and has permitted fund managers handling its funds to invest only in government bonds and higher-rated corporate bonds. In order to boost Indian pension sector, the government has recently cleared pension Bill which has opened up Indian pension fund management to foreign players, with foreign direct investment (FDI) limit of 26%.

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Govt relaxes pension fund investments norms to boost returns

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