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R. Y. Narayanan

EVEN as the contours of the new pension scheme Varishtha Pension Bima Yojana are yet to unfold, it is not clear why some of the private insurance companies should be making a beeline to the Finance Ministry to impress upon it not to make the scheme a monopoly of LIC but permit private insurance players too to have a share of the pension cake.

The Finance Minister, Mr Jaswant Singh, while presenting the Budget, announced the launch of the pension scheme by LIC with a fixed return of 9 per cent and a minimum and maximum payment of monthly pension at Rs 250 and Rs 2,000 respectively. He also said that the Government would meet any shortfall in revenue generation by LIC in meeting the pension obligation.

While it is true that singling out LIC for the launch of the scheme has denied the other insurance companies a level playing field and has led to some heartburn, what is not clear is why they should be clamouring to get onto the bandwagon when there are several ifs and buts about the scheme itself as also on how long the Centre would continue to underwrite the shortfall, if any, in running the scheme.

Being a fixed-income scheme, for getting a maximum returnof Rs 2,000 a month, a pension optee should be at least 55 years old while joining the scheme and make a deposit of about Rs 2.67 lakh. Though the Government has not announced all the details, such as the number of persons in a family who can join it and if the scheme is taxable, it is quite possible that enough care will be taken to ensure that there is no flood of entry.

A crucial issue is how long the Government will be able to bankroll the loss, if any, suffered by LIC, and other private players, if permitted, in running this assured pension scheme. The Government is unlikely to allow all insurance players entry into the scheme and may prescribe certain benchmarks, such as proven ability in treasury operations/capital market investments, etc. This is because the gap between the promised and the actual yield should not become a chasmfor the Government.

A more important factor for the investors to consider is: Are there not any (better?) alternatives to the proposed pension scheme? Leaving aside the other pension products that the insurance companies, both LIC and private players, already offer that give no assured returns, there are a few other products that have the sovereign backing and, hence, failsafe. Top in the list are the Public Provident Fund (PPF) and the Post Office Monthly Income Scheme (POMIS).

The PPF offers a slightly lower interest rate of 8 per cent per annum, but as the interest is cumulative and completely tax free, the actual yield is higher and a better bet for the investors who have the patience to build a substantial corpus over a long period since it offers flexibility of investment. Of course it is not a single investment scheme.

By investing the annual PPF withdrawals in flexi saving accounts of banks, one can earn some additional interest income as well.

In the case of POMIS too, the advantage is that the cap on maximum investment is higher at Rs 3 lakh than under the new pension scheme and one can opt for a joint account to get a higher monthly income. A major advantage is that at the end of the deposit period, the investors get a bonus of 10 per cent of the deposit amount, which pushes up the yield further.

Since the Postal Department has a wide reach, it may not be difficult for investors to easily benefit from the scheme. Neither scheme has any age restriction, unlike the new pension product, which has put 55 as the entry-level age.

Moreover, a salaried person may not have Rs 2.67 lakh as surplus cash for investment at 55, unless he is a VRS optee; for getting the maximum benefit, since the normal retirement age is 58/60 years and to enter the scheme, he may have to put his hands in the savings bank.

Another issue for the investor is how long the 9 per cent yield would hold its allure. Already, the rate of inflation has crossed the 6 per cent mark and even if the prices of petroleum products ease with the end of Iraq conflict, the impact of drought will keep the inflation rate high.

Once the credit demand picks up with the revival of the industrial sector, the interest rates may start to harden.

In such a scenario, the difference in interest rates of PPF/POMIS and the new pension scheme may narrow making the latter a not-so-lucrative option.

There is also the possibility of limited appeal of the new pension scheme as already government employees are covered by pension schemes and the private sector employees too have a PF-linked pension scheme that has been made mandatory since 1995.

Hence, the new policy would appeal more to the self- employed and to those who are receiving pension but would like to have some assured return as well.

It is also not clear if the Government would make it mandatory for the LIC or the private insurance companies allowed to offer this pension product to share with the investors in the new pension scheme any profit generated from the investment of the pension corpus that is higher than 9 per cent even after factoring the operational expenses. If it does not do so, then the investors may end up losers.

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