I spoke to the head of a large public sector financial institution. He said that while restricting investment in G-Secs is a bad idea, allowing PSUs to manage money is good. And not merely because he would get to manage the huge sums but because, within a year or two, private sector pension fund managers would be in the market. But allowing only PSU fund managers would be discriminatory and the Bill could be challenged.

If the bill is passed, it will not only mark the beginning of a fully-funded pension for government servants but also embrace those who don’t have access to long-term retirement planning instruments. In the new scheme, returns will not be guaranteed (defined benefits) but will depend upon how much a person invests (defined contribution). This money will then be invested in varying percentages, from 100 per cent debt to 90 per cent equity.

By saying that all this money should be invested only in G-Secs, Mr Prakash Karat is taking away the average Indian’s choice of creating long-term wealth. Over the past one, three or five years, the returns from the market have outperformed those from gilts by 23 to 33 percentage points. But this is too short a timeframe to measure the performance of asset classes for a long-term product like pensions and not repeatable going forward.

One answer lies in calculating what is known as the equity premium, the excess return that you can expect from equities above a risk-free return; in India’s case, the returns that Sensex or Nifty can give over the safest 364-day government bond. This premium, according to J R Varma of IIM-A, ranges between 8.75 and 12.5 percentage points (PP). Economist Ajay Shah has estimated it at 8 PP. Aswath Damodaran of Stern School of Business, New York University has calculated it at 5.2 PP, while Rajnish Mehra of University of California, Santa Barbara sees it at 11 PP.

... contd.