Pensioners' bond gets a new avatar

Dada-Dadi bonds "" likely to be modelled on Granny Bonds overseas "" may replace the Varishtha Pension Bima Yojana. The Varishta bonds, launched by Prime Minister Atal Bihari Vajpayee on July 14, comes up for review in March.

It guaranteed a nine per cent return for pensioners. The Dada-Dadi version of the instrument will come into effect on April 1.

Borrowing the idea of the Granny Bonds introduced in the UK, the government has decided to allow those above 60 to buy these bonds.

The Varishtha Pension Bima Yojana, run by Life Insurance Corporation, has an upper investment limit of Rs 2,66,657 for every person who is above the age of 55 years. This yields a maximum monthly income of Rs 2,000 per investor.

Incidentally, while the Life Insurance Corporation of India (LIC) has not received any information on the Centre closing fresh subscription to the existing pension bond scheme, the government had at the time of its launch stated that the scheme would be reviewed in March.

The UK's Granny Bonds are usually marketed by the central bank or the government, with the exchequer taking full responsibility for paying the high-interest on these bonds.

For instance, in the UK, while the National Savings' rate for an over the counter account is very low, Granny Bonds pay 3.8 per cent gross for a one year term and more for a longer period, and these are marketed through post offices.

The Centre has not specified the exact interest on the 'grandfather-grandmother' bonds, only stating that the bonds would carry a higher interest rate than the prevailing market rates.

The government is likely to bear a subsidy of 3.5-4.0 per cent on Varishta Pension Bima Yojana, marketed and managed by LIC.

The Rs 4,100 crore mobilised in less than six months of launching the scheme fetches an average yield of just six per cent. This is as against the nine per cent guaranteed returns plus expenses.

Earlier, LIC had expected a subsidy of about two per cent. In a falling interest rate regime, the government will have to cough up much more to subsidise the Granny Bonds.

Assuming the differential to be four per cent and taking the assured return at nine per cent and LIC's ability to earn six per cent, on the current collections the government would have to foot a subsidy of Rs 123 crore.

The figure will obviously go up if the new scheme is more successful.