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Labour Minister Sahib Singh Verma on Wednesday expressed reservation over several provisions of the new pension scheme for government employees, even though he said he would go along with the scheme cleared by the Union Cabinet recently.
The proposed scheme did not provide any safeguards for investors and against any mismanagement by private fund managers or any guarantee on the minimum and family pensions, he said, addressing a seminar, jointly organised by the India Invest Economic Foundation and Assocham.
Verma cited the Chilean model, based on which the new pension scheme had been framed, saying there were problems in entrusting pension funds to private hands as that always had an element of risk and the country could face political problems.
It was important that no mis-selling took place under the proposed scheme, he said and indicated that the new scheme was likely to have high administrative and accumulation costs.
"Publicly managed pension funds have low administrative costs in comparison to privately managed pension funds," Verma said.
On accumulation costs, which is a 'serious problem,' he said it would be on the higher side as the market was not developed.
Verma said there was no provision for family pension in the proposed scheme and it "clearly brought out lack of basic protection if the bread-earner of the family passed away."
"My ministry has no objection to the proposed scheme and we need to have a contributory scheme," he said, adding that his ministry had sided with the proposed measure considering that there was a need for having a contributory pension in the country.
He said at the Group of Ministers meeting, chaired by Planning Commission Deputy Chairman K C Pant, it was discussed and the members were appreciative of his views.
Since government organisations were scattered across the country, there was a need to ensure that the contributions from the investors reached the investment points well in time, he said, hinting at lack of infrastructure for the new players.
The proposed system would be mandatory for new entrants into the government service, excluding defence forces in the initial stage, and replace the existing pension provisions.
The monthly contribution for the pension would come from 10 per cent of the employees' salary and dearness alliance and a matching contribution from government.
The pension contribution and accumulation would be accorded tax preference up to a certain limit.
Individuals can exit at the age of 60 years but have to mandatorily invest 40 per cent of pension wealth to purchase an annuity from an IRDA-regulated life insurer.
State governments will have the option of joining the new pension system.
Verma also said he will try to maintain the 9.5 per cent interest on EPF for the next fiscal as long as defaulting establishments were there.
"Next year (2004-05) also we may continue with 9.5 per cent interest rate," Verma said.
The Central Board of Trustees of Employees Provident Fund Organisation had slashed the interest rate by 0.5 per cent but offered a bonus of 0.5 per cent to virtually retain the 9.5 per cent for 2003-04.
Replying to query as to how EPF could manage to offer higher returns when interest rates were coming down in the economy, he said it was purely based on returns the EPFO got.
Verma had earlier said EPFO had invested in instruments, that offered interest rates as high as 16 per cent.
Apart from the investments, EPFO also got extra income in the form of penalties levied on defaulting establishments.
"Till defaulters are there, we do not have any problems," Verma said.
Penalties were as high as 100 per cent if defaulters had not credited their EPF share for three years.
Verma had recently revealed that over 2,100 establishments (both in public and private sectors) owed as much as about Rs 1,100 crore (Rs 11 billion), but the amount realisable was only Rs 571 crore (Rs 5.71 billion).