The Insurance and Regulatory and Development Authority Chairman N Rangachary on Friday asked the government to suggest suitable investment channels for pension funds.

New funds have just the three existing investment avenues available -- government debt, corporate debt and equity markets. The maximum maturity period of corporate debt does not exceed seven years.

And in the stock markets, thirty to forty per cent of the equity in a majority of large cap companies is held by financial institutions, while fifteen to twenty per cent is held by promoters.

The floating stock in the market is too little, Rangachary said at the 'Private Pensions in Asia' conference being held here.

A pension or life fund is thus compelled to go for government securities which have no more than 15 to 20 years duration, whereas the investment inflow into a pension fund is of twenty-five years plus duration.

This will lead to a severe asset-liability mismatch, he warned.

Pension funds would also have to face lower returns on one side and the reluctance of individuals to join the scheme on the other, he said.

Worldwide, in all developed countries pension funds are larger than life insurance funds and in India also this would happen over a period of time, he predicted.

N K Shinkar, consultant (actuary), IRDA (he designed the standard pension plan), said the government should allow pension funds to pick up equity stakes in the divestment process of blue chips such as Maruti. Shinkar is a consultant (actuary) for IRDA.

Similarly, medium-term opportunities like municipal and other state government bond investments can be looked at by these funds, provided these state controlled bodies take up reforms in an intensified manner, he added.

Shinkar also asked the government to permit more than six pension funds to enter the business, because the decision to introduce limited competition is anti competitive. It can be recalled that the government took a decision to allow Unit Trust of India and five private pension fund managers to begin with.

It has not yet announced on what criterion these companies would be selected from among the competition. It has also barred the life companies from directly entering the business and is contemplating to permit joint ventures by life companies to enter the business.