THOUSANDS of government and private employees in the US, Europe and other advanced countries are able to get fatter pensions, thanks partly to the booming equity and property markets in India.

Several international pension funds have invested hundreds of millions of dollars in Indian capital markets and the real estate sector over the past three years, and have started reaping handsome benefits.

They include pension funds like the California Public Employees’ Retirement System (CalPERS), the General Motors Employees’ Pension Fund, the Tennessee Valley Authority, Commonwealth of Massachusetts Pension Reserves Investment Trust, Public School Retirement System of Missouri, the San Diego County Employees Retirement Association, the San Jose Police and Fire Department Retirement Plan SBC Master Pension Trust, the Boston Retirement System, besides several US State Government Pension Funds.

European pension funds that have invested in the Indian equity markets include UK’s Shell Pensions Management Services Ltd, the Lonmodtagernes Dyrtidsfond, the Danish state pension fund, and the Netherlands-based Stichting Gemeenschappelijk Beheer En Administratie Beroepspensioenfondsen Artsen. Even the UN Pension Fund has invested in the Indian stock markets.

Most of these funds manage hundreds of billions of dollars saved by public and private employees in their countries, which are invested in global stock markets. Funds like CalPERS are major shareholder activists, ensuring that corporate governance norms are followed by managements of companies that they have invested in, and also making certain that owners’ wealth is protected.

Unlike mutual funds or retail investors, pension funds don’t churn their portfolios often, and ensure stability of stock markets. They manage to get hefty returns thanks to their long-term investment strategies, irrespective of the ups and downs of the market.

Ironically, government employees and other workers in India are unable to enjoy the benefits of the booming stock markets here, because of purblind political leaders, who would rather cling to antiquated dogmas that have been discarded in most parts of the world, including China, instead of being pragmatic.

Last week, Prime Minister Manmohan Singh and Finance Minister P. Chidambaram made the first bold move to free the pension funds sector from the grip of anemic returns, and prevent a looming crisis that threatens to cripple public finances in the country in the coming years.

“The rising pension bills at all levels of government would be increasingly difficult to finance in future, given the other demands that are there on our resources, particularly for enhancing our expenditures on essential social sectors such as health, education and rural development,” Singh told state chief ministers.

And despite stiff opposition from the Left parties, which help prop up his United Progressive Alliance (UPA) government, the Prime Minister announced that five per cent of funds under the New Pension Scheme (NPS) – launched about three years ago, covering central government employees, and employees of 17 state governments – would be invested in the stock markets.

INDIA’S pension reforms have been stalled over the past few years by the leftists, who control most government employees’ unions, and are vociferously opposed to funds being invested in the stock markets.

Most countries around the world face a major pension crisis, as the prevailing ‘defined benefits’ system – where employees are guaranteed a fixed pension depending on their last-drawn salary, irrespective of the performance of the pension fund – threatens to swallow a huge chunk of government revenue.

In India – where most government employees don’t even to have contribute to their retirement funds – pensions liability of the central and state governments is burgeoning; it will add up to a whopping one trillion rupees (about $23 billion) in just about two years, an over 40-per cent jump in just four years.

This would be equal to about three per cent of gross domestic product (GDP), and more than double what the government spends on basics including education, healthcare and rural development. Amazingly, the trillion-rupee pension liability relates to a mere 10 per cent of the country’s workforce, comprising a pampered constituency – of government employees – which has the backing of most trade unions.

Reforming the pensions sector has been on the government’s agenda for the past 10 years. However, while the government managed to open up the insurance sector – which had been dominated by state-owned companies – in the face of massive resistance from trade unions, it soft-pedalled on pensions reforms.

In 2004, the central government introduced the NPS, a defined contribution scheme, covering all new employees hired by it. Almost a score of state governments also joined the scheme. Employees have to contribute 10 per cent of their salary, and the employer (the government) would make an equal contribution.

In the past, the government would contribute to its employees’ pensions by setting up a fund that would invest in government securities. During the high-interest-rate regime, the government could afford to manage to grow the fund, but with interest rates having come down to realistic levels, it is difficult to keep pace with the ballooning pension’s bill.

The government introduced the Pension Fund Regulatory Development Authority (PFRDA) Bill, and also set up the regulator. However, the leftists have stone-walled the legislation, preventing the government from enacting it. The PFRDA bill envisages that a part of the funds be invested in the stock markets, to ensure better returns.

The employee will have a say in whether the fund should be invested in debt, equity or a combination of the two. About 100,000 central government employees have already signed up for the NPS, which has also raised a corpus of Rs40 billion so far.

Last week’s decision by the government would allow five per cent of the funds to be invested in shares of companies that have an investment grade debt rating from at least two credit rating agencies. The remaining funds would be invested in central government securities (25 per cent), state government securities (15 per cent), public financial institution bonds and securities (25 per cent), and the remaining in any of these three categories.

THE government plans to push the PFRDA bill in the forthcoming budget session of Parliament, despite the left’s opposition. Both Singh and Chidambaram have met senior left leaders in recent weeks and appear to have convinced them about the need for the passage of the bill.

Last week, 17 state governments backed the centre’s move, indicating the wide acceptance of the need to invest pension funds in the stock markets. The government has been facing huge problems in managing the Employees’ Provident Fund Organisation (EPFO), with guaranteed returns eating into the very corpus.

The fund, which is under the Labour Ministry, manages about a trillion rupees contributed by about 40 million employees and their employers, and in the past the government directed it to pay interest rates of about 10 per cent. Last year, the government slashed the rates from 9.5 per cent (paid over the previous three years) to 8.5 per cent, as the Finance Ministry refused to subsidise it.

Despite howls from trade unions – belonging to both the left and right parties – the government went ahead and reduced the returns. The EPFO had to dip into its reserves to pay interests, as its earnings in government securities did not fetch it huge returns. This year, the government might be forced to reduce interest further to eight per cent. The organisation may finally look at the stock markets to help raise additional revenues.

Prime Minister Singh last week warned that India will face huge challenges in future due to the level and speed of ageing of population. “The life expectancy at age 60, which is around 16 years at present, is expected to rise rapidly, requiring longer periods of retirement support for the elderly,” he pointed out. “This becomes particularly acute for the unorganised sector, which is by far the major employer of our labour force.”

There are about 90 million Indians who are above the age of 60 at present. This is expected to jump to 200 million by 2030 and 330 million by 2050. According to rough estimates, the pensions market would surge to Rs4 trillion by 2025, and if the government continues to subsidise pensions and returns, it would have to cut down on most other expenditures including on the social sectors and in defence.