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Saturday, March 26, 2011

What are the prospects for pension reform in India?

Finance Minister Pranab Mukherjee on Thursday introduced the Pensions Fund Regulatory and Development Authority (PFRDA) bill, paving the way for long-awaited pension reforms in Asia's third-largest economy.
The bill, which failed to win parliamentary approval during Prime Minister Manmohan Singh's last government due to opposition from its leftist allies, aims to speed development of the sector and limit the government's pension liabilities.
Below are some questions regarding pension reform in India:
What are main provisions in pension bill?
The pension bill would bring into law a pension system that was introduced under an executive order in 2004 that allows private companies to run federal and state government pension funds, investing part of the cash in Indian stocks and corporate bonds. Up to 50% can be invested in equities.
The government introduced the system in 2004 for all non-military employees recruited since January 2004, shifting from defined benefits to a defined contribution regime.
The system would be mandatory for most state employers, while private sector employers and staff would have the option of participating. The only pensions that would remain fully under government control are for the armed forces.
The bill would give the Pension Fund Regulatory and Development Authority statutory powers to regulate and develop the industry.
Will foreign players be allowed?
The legislation is silent on allowing foreign companies to manage pension funds due to strong opposition from left parties and trade unions, which may disappoint global players eager to manage retirement assets in the world's second most-populous country.
Though an earlier draft had allowed up to 26% foreign investment into pension fund managers, the bill said the government would separately announce a foreign investment policy for the sector.
Officials said the government would like to allow foreign investment in the pension sector on par with insurance, where overseas players can invest up to 26%, a cap that is expected to rise to 49%. However, New Delhi may hold off on unveiling foreign ownership rules until the bill passes.
What does this bill change from the current situation?
The pension system introduced in 2004 does not have legislative backing, making it vulnerable to court challenges and slowing its development in the absence of a strong regulatory framework.
The existing set-up is also vulnerable to political uncertainty, and could be dismantled by a new government.
How big is the Indian pension sector?
India does not have a universal social security system.
Current pension schemes mainly cover employees in the organized sector, which makes up just 12% of the workforce in a population of 1.2 billion.
There are nearly 80 million elderly Indians, around one-eighth of the world's elderly population, most of them not covered by any pension scheme.
Millions are joining the workforce every year in an economy on track to growing at nearly 9%.
How much does India spend on pensions?
The federal government, which employs nearly 5 million people and pays pensions to 3.8 million retirees, is forecast to spend Rs 545.2 billion (USD 12.1 billion) in the next financial year, up 26% from 2010/11 budget allocations.
The state-run Indian railway system also funds pensions for its 1.5 million employees.
Most states have shifted to pension schemes where both the employer and staff make contributions, a move aimed at reining in expenditure and improving fiscal health.
The states' total pension bill was estimated at Rs 627 billion (USD 13.9 billion ) in the 2008/09 financial year.
Employee Provident Funds, which are covered by other legislation, manage more than USD 50 billion worth of assets for around 40 million employees.
Private pension funds cover over 1.1 million employees, with assets approaching Rs 70 billion (USD 1.6 billion).
Is the bill likely to succeed?
The pension bill is widely expected to be approved by parliament, probably in the monsoon session in June or July.
A similar bill was introduced in parliament in 2005 but ultimately lapsed without winning approval. The new bill has been discussed by a parliamentary panel that includes opposition members.
What sort of foreign interest is there in pension funds?
IDFC, State Bank of India, ICICI Prudential Life Insurance, Kotak Mahindra Bank, Reliance Capital and the state-run Life Insurance Corp of India manage pensions in India.
Most of the 23 life insurance players in India, nearly all of which have a foreign partner holding a 26% stake, are eager to enter the pension fund market, analysts said. Global players holding stakes in Indian operators include Aviva, AIG, and AXA.
What is the benefit of pension reforms?
Pension reform would help bring millions more employees into pension plans. It would also channel investment into stock markets as well as long term assets, including the infrastructure sector.
The government wants to ease rules for insurance and pension funds to allow them to invest in infrastructure, where there is demand for about USD 1 trillion in investment for the five years to 2017.
The new pension system would also help federal and state governments cut their future liabilities, helping to rein in fiscal deficits.
Source:, March 24, 2011

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