Should pension funds invest at least 5 per cent of their corpus into the capital market in order to boost their returns? This question usually meets with a snap answer; unfortunately the yea-sayers equal those who say nay. Reformists believe that a 5 per cent investment is too tiny to cause serious damage to the overall corpus, even if it is grossly mismanaged, while it can boost overall returns of the pension fund if managed well.

On the other hand, many of us who have watched how the system operates and how easy it is for unscrupulous market intermediaries to induce fund mangers to buy dud stocks or provide exits to a price ramping operation are wary about opening the doors to capital market investment, without a completely revamped system of regulation, supervision, disclosure and accountability.

At the end of January, Trustees of the Employee Provident Fund Board, once again rejected the proposal to invest any money in the capital market. The Communist Party of India (Marxist) also declared its intention to oppose capital market investment by the New Pension Scheme or to allow private players to manage these funds.

In fact, permitting the new contributory pension funds to invest in the market will create the biggest pool of funds after the demise of the Unit Trust of India. It will also be the target of every unscrupulous market operator and businessman colluding with friendly politicians.

Are these fears justified? Those who support investment of pension funds in the stock market must pay attention to the Chinese stock market bubble. Edward Chancellor’s recent column in the Wall Street Journal says that the bubble commenced after the state social security funds started buying up stocks in 2005. According to him, “state owned enterprises, local governments and Communist Party bigwigs are widely believed to be deploying funds in the stock market”.

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