The government is likely to cap foreign investment in the pension fund sector at 26 per cent.

According to government sources, the finance ministry wants to tread cautiously on the issue because unlike mutual funds, investment in pension funds is long term.

They said the ministry's Cabinet note on pension funds did not touch upon the issue of foreign direct investment.

The cap would be notified separately by the department of industrial policy and promotion, they added.

The sources said the pension fund sector was akin to the insurance sector, where the government has retained the cap on foreign investment, including FDI, foreign institutional investors, non-resident Indians and overseas commercial bodies, at 26 per cent, despite persistent demands by insurance companies to raise it to 49 per cent.

Also, insurance companies offer annuity products similar to those to be offered by the pension funds.

To begin with, the government plans to offer six licences by inviting even global pension funds to set up shop in India.

If pension funds were treated on the same lines as mutual funds, there would have been no need to set up a Pension Fund Development and Regulatory Authority, the sources said, adding that they could have been brought under the ambit of the Securities and Exchange Board of India.

The interim Pension Fund Development and Regulatory Authority will prescribe the minimum capitalisation norms for the pension funds.

For insurance companies, the Insurance Regulatory and Development Authority had specified a minimum capital of Rs 100 crore (Rs 1 billion).

For entrants to government services from January 2004, the Centre has decided to shift to a defined contribution regime, wherein employees will have to fork out 10 per cent of their basic pay towards their pension with an equal contribution by the government.

The employees will have the option to shift between the new pension funds, which will offer three investment options: safe, balanced and growth.