There will be no exit load for investors in pension funds to switch between pension plans.
This was stated by UK Sinha, joint secretary, ministry of finance, at a seminar on pension reforms organised by Assocham (Associated Chambers of Commerce and Industry).
Sinha also effectively pushed the date for the launch of the funded pension scheme, that is to replace the current pension scheme for newly recruited government employees, by saying the ministry would need another five to six months' lead time for finalising the details.
The joint secretary said the pension fund managers would be expected to minimise the cost of running their pension plans by investing passively in index-linked schemes.
Since the size of the market would not be more than 50,000 new government recruits per annum, it made no sense to allow a large number of players to enter the arena initially.
He added that the ministry would select pension fund managers for the new scheme on the basis of lowest cost and management fees quoted by the bidders, provided their track records in successfully managing investment funds turned out to be similar.
The Centre has decided to switch over to a compulsory pension scheme for new government employees.
Under the new plan, instead of the government providing life-long pension benefits, the employees themselves will pay for their pension schemes with a matching contribution from the government.
Sinha said the government might introduce qualified planners to guide the contributors to pension funds to invest in the right plans.
"People must realise that long term investment in equity is as profitable as investing in real estate", he added.
Sinha ruled out the possibility of the government providing any assured minimum benefit for the contributors to the new pension schemes and said it had to be a market-based solution.
To ensure that there was a firewall between the people and the companies, the central record keeping agency would provide the aggregate level data of fund transfer to the pension fund managers.
Contributions to the fund would be exempted from tax, but not on their maturity, Sinha added.
Finance ministry consultant Ajay Shah said the country now had a stock market infrastructure comparable to the best in the world. This made it feasible to introduce the pension reforms easily.
The prospect of a stock market crash wiping out the pension of a person was not possible as the contributions as well as redemptions from the funds were on a monthly basis and so the risks were spread out, Shah said.
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