Pension Funds: Their impact on Equity Market

Pension Funds constitute a pool of assets created by contributors to a pension plan for the exclusive purpose of pension plan benefits. In India only about 10% of the citizens are covered by the defined benefit plans like the Govt. servants. Pension funds serve as an important vehicle for social security of the people not covered by defined benefit plans.

Pension Funds worldwide are important shareholders of listed and private companies. According to analysts Pension funds have assets worth more than US$ 24 trillion wordwide. It is estimated that about 5% of this corpus is likely to be invested in Indian equity markets. In the US pension funds invests 70% of their corpus in equity related instruments. In October 2007 SEBI allowed pension funds to register as FII's. About 40 such funds have registered with SEBI during the past eight months. This includes 15 of the world's top 20 pension funds. Pension funds due to their large capital base and longer term investment horison, are more stable amidst market turmoils.

In India pension funds were initially not allowed to invest in equities. Pension Fund Regulatory & Development Authority (PFRDA) was established in 2003, and it launched its New Pension Scheme (NPS) in January 2004. The scheme has collected funds of around Rs. 3500 crores so far. Under the scheme upto 15% of the corpus can be invested in equities and the balance 85% in fixed income securities. The amount to be invested in equity may be hiked, depending upon the PFRDA bill which is likely to be tabled in the Lok Sabha in the winter session next month. State Bank of India, the country’s largest bank, has floated SBI Pension Funds Pvt Ltd (SBIPFPL) to manage investment of the contributions made by the employees of central and state governments who choose to join the scheme, SBIPFPL has got the maximum share among the fund managers and will manage some 55% of the corpus. Life Insurance Corporation of India and UTI Asset Management Company Pvt. Ltd are the other fund managers.

The impact of such large inflow into Indian equity markets will have a positive impact on the markets, and at the same time will lend a semblence of stability to our markets. The full impact of Pension fund investments will be seen in our markets from January 2009 onwards. If you beleive in this story, and its potential for our equity markets, do get ready to board the stock markets - but wait for the next correction to increase your commitments. The long term story of Indian equity markets is going to be written by the Pension Funds.