Pension fund equity play to outshine FII debut

Domestic pension funds, required to make equity allocations for the first time this year, are likely to contribute more to inflows than foreign institutions did in the first three years since they were allowed entry into the stock market

The Labour Ministry announced on Tuesday that the Employees’ Provident Fund Organisation would be required to allocate 5% of their incremental inflows to equity, pegging inflows for this year at Rs 7,500-8,000 crore. However, an earlier notification regarding private pension providers is likely to approximately add up to another Rs 3,400 crore. Thus, the total pension inflows this year could reach close to Rs 11,000 crore.

In absolute terms, this is more than the Rs 9,936 crore foreign institutional investors brought in the first three years of their stock market debut in 1992.

The Rs 7,500-8,000 crore figure is based on a reported estimate of Rs 1.5 lakh crore in inflows during the year. However, private trusts accounted for Rs 33,966 crore out of the total Rs 1.06 lakh crore in FY14 inflows, the latest figures provided by KPMG based on EPFO data. Even assuming that this does not change, these private trusts can invest up to 15% in the share market. This would mean that their equity allocation could be as high as Rs 5,094.6 crore, assuming no growth in inflows since FY14. Add to this the 5% allocation on flows from non-private sources. This works out to Rs 10,897 crore. 

This is not even taking into account gratuity funds and superannuation funds, which are also allowed to invest up to 15% in equities. How much of this can actually make their way into the stock market would depend on if they make use of their full allocations. Experts believe it would make sense for them to do so. 

“This move by the government is to encourage long term retirement money into the equity market, which tends to provide higher returns over the long term. For instance, the average 20-year daily rolling return of the S&P BSE Sensex is 15% since 1979,” said Jiju Vidyadharan, Director, Funds & Fixed Income Research, CRISIL Research.

“…A robust regulatory mechanism for investment in equity by the Non-Government Provident Funds, Superannuation Funds and Gratuity Funds will ensure the safety of funds made by trusts as well as facilitate the deepening of capital markets in India and fuel economic development,” said Vikas Vasal, Partner, Tax at KPMG.