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IT IS DIFFICULT to see how the public provident fund has lost it relevance, as the former UTI chairman, Mr S. A. Dave, the author of the official report on old age social security, argued recently. Setting aside a portion of current incomes to provide for later years is the key ingredient of any pension scheme. The PPF does this quite well and provides an institutional framework for the public to accumulate savings. True, contributions to the PPF offer some tax benefit. But that is no reason to rubbish its role in providing financial security to members. Some tax shelter is an essential component of any pension scheme. As a matter of fact, in many countries contributions to individual retirement account plans are fully sheltered from income-tax whereas in India the exemption is only partial with restrictions both on the quantum of savings for tax purposes and the rate at which a rebate on tax would be extended for such contributions.

But even more specious is the argument that a phase out of the PPF would be necessary to provide a critical mass for the proposed pension scheme for newly recruited government staff. The PPF was started for the benefit of workers in the unorganised sector and self-employed professionals who, unlike employees in the organised sector, do not enjoy the benefit of contractual savings. This rationale exists even now. That being the case, these sections have to forego the benefit of an institution to manage their current surpluses that will provide for financial security in later years merely because new recruits into government service would divert monies beyond the contractual savings to the PPF rather than to the private pension funds, thereby depriving these institutions of an opportunity to manage a larger corpus of savings.

It is true that guaranteed returns are an anachronism at a time when market forces are ruling supreme. However, they are not bad in all contexts. Guaranteed returns to build retirement wealth are desirable in the light of the old-age security crisis. The only necessary condition is that they reflect the reality of long-term interest rate movement in the economy. The PPF has remained a high-interest island for decades now. This needs to be corrected. Even now, the PPF offers tax-free returns of about 8 per cent when the after-tax return offered by the market is about 4 per cent.

There now remains only the argument that the Government should get out of activities that the private sector is best equipped to handle. But for this to happen, private pension fund mangers must first prove their worth in the market place. Only then can the Government think in terms of vacating this field. Those who argue for greater choice to consumers in the context of economic liberalisation should realise that consumer welfare is enhanced even if some of that choice happens because of the presence of public sector players.

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