Prime minister Manmohan Singh has asked the states to cooperate with the centre's proposal to allow investing a part of pension funds in stock markets and other options such as bonds, even as the Left allies of the UPA government have opposed pension reforms or the proposed new Pension Reforms Bill.

Pension reforms have assumed importance as both the centre and state governments are facing the rising bill under this head. The total expenditure of the central government on pension payments to its retired employees has gone up from Rs3,272 crore in 1990-91 to Rs28,963 crore in 2005-06.

In his address to the chief ministers' conference on pension reforms, Singh said, "The suggestion being considered is that pending a resolution of all issues relating to the PFRDA bill, these accumulated funds may be allowed to be invested in accordance with the investment pattern prescribed for non-government provident funds."

Dr Singh said the pattern permitted for non-government provident funds would fetch a superior return for new pension system (NPS) funds than that yielded at present from government bonds without compromising on safety.

The new investment norms propose that five per cent of the funds would be invested in shares of companies that have an investment grade debt rating from at least two rating agencies.

The proposed sources of investment are 25 per cent in central government securities, 15 per cent in state government securities, 25 per cent in bonds and securities of public financial institutions and 30 per cent in any of these three categories.

Central government employees recruited since 1 January, 2004, are under NPS, which is based on a defined contribution system as against defined benefit of the old pension system.

Seventeen state governments have also joined NPS. The contributions of these new employees have accumulated in the public account, which fetches a fixed annual return of 8 per cent only.

The prime minister said at present only 11 per cent of the workforce is covered under some form of pension scheme and workers in the unorganised sector, constituting 90 per cent of the labour force, need a comprehensive pension system, which they can subscribe to.

Dr Singh said that India would face huge challenges in future due to the level and speed of ageing of population against the backdrop of the vast labour force in the unorganised sector being bereft of any options for their old age.

The rising pension liabilities of the government at all levels would be increasingly difficult to finance in future, given the other demand on state resources particularly for enhancing expenditure on essential social sectors such as health and education, he said.

Dr Singh said, while the government has launched various social welfare schemes like the national rural employment guarantee programme, Indira aawas yojana, the national rural health mission, it does not have a comprehensive social safety-net focusing on old age income security covering the bulk of India's population.

However, West Bengal's Left front finance minister Asim Dasgupta circulated a speech to the media, saying that with the cut in salary and pension, absence of government guaranteed retirement benefits in the NPS and the distinct possibility of a sustainable defined benefit pension system, the state was not in a position to accept the NPS.

"We strongly urge that a more in-depth factual and analytical discussion is essential before taking further step toward NPS," Dasgupta said.

The prime minister said one major objective of the pension fund regulatory and development authority (PFRDA) bill is to put in place the architecture and the delivery mechanism for pension schemes.

"It is my belief that there is a lot to be gained by moving forward and allowing a multiplicity of pension products delivered by a variety of agencies, to be offered to our people," he said.

The PFRDA bill has been pending in parliament opposition from the Left parties. The standing committee on finance has recommended the bill to Parliament, subject to certain modifications and amendments.

Finance minister P Chidambaram said that taking into account the recommendations of the committee, the centre has proposed that the bill be passed with essential features like, freedom for individuals to choose their investment portfolio and management of the funds by professional bodies.

The importance of the conference could be gauged from the fact that besides the Prime Minister and Finance Minister, External Affairs Minister Pranab Mukherjee, Home Minister Shivraj Patil, Defence Minister A K Anthony and Labour Minister Oscar Fernandes were present in the discussions with state representatives.