Govt’s investment dilemma: pension funds in the market

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”.

The Chinese government, which is a player in every aspect of the stock market, including control over stock brokers, is trying to talk down the market for fear that an all out crash could take the country into recession.

Chancellor writes, “The aftermaths of great financial bubbles also follow a common course — investor disappointment often give way to recriminations and a political backlash”. It is something that our government, already fighting the Inflation demon, would want to keep in mind.

While opposed to direct equity investment, many of us believe that a index tracking fund is probably safer, has less scope for mal-investment while providing the benefit of index appreciation in a fast growing economy.

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