The government may allow 100 per cent foreign direct investment in the pension sector, even though it is in favour of gradual opening up of the sector.

Government officials said they would have to decide on whether to treat pension fund companies as insurance companies or as mutual funds. There are no FDI limits on mutual funds, while there is a cap of 26 per cent on FDI for insurance companies.

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However, the officials said they were keen that a domestic company should get the mandate as the central record-keeping and accounting entity for the pension sector.

There will also be far lower entry norms for pension funds, compared with the insurance sector, where companies have to ensure a minimum capital requirement of Rs 100 crore (Rs 1 billion) for doing underwriting business and Rs 200 crore (Rs 2 billion) for the reinsurance business.

However, the actual sum will be decided by the Pension Fund Regulatory and Development Authority.

The officials said since the pension fund management business was a new sector, the government would have to move cautiously on the issue of FDI, even though several pension funds from abroad had evinced interest in the business.

On the capital requirements for entering the sector, they said the insurance companies had to make provisions for paying claims from their principal right from the point of setting up shop, whereas the pension funds would be simply performing the role of asset management company for the next 30 years. So the demand on their capital will be far less.

However, to ensure that only sound companies entered the business, the PFRDA is expected to lay down stringent conditions on experience in fund management here and abroad, along with details of assets under their management.

Since the guidelines have set no upper limit for the number of players in the field, the PFRDA will insist on the presence of at least one public sector company in the fray, though there could be more. Among the domestic fund managers, SBI Caps and ICICI Bank besides UTI AMC have already shown interest in the sector.

The companies will also be required to publish daily figures of net asset value of the funds under their management. The PFRDA will also have to consider the possibility of limiting the scope of interface between the asset management companies and the pension contributors.

This may be done to ensure that the companies do not swing the decisions of the public by offering inducements as has happened in many countries abroad.