Technical Assistance Consultant’s Report

Project Number: 36346-01 September 2006

TA 4226-India: Pension Reforms for the Unorganised Sector
Financed by the Government of the United Kingdom

The 7th Annual IIEF Pension Policy Conclave

Organized by Invest India Economic Foundation New Delhi, India For Executing agency: Markets Division) Ministry of Finance, Department of Economic Affairs (Capital

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.

The 7th Annual IIEF Pension Policy Conclave, 2005 In December 2003, the Indian government replaced its central (civil service) pension and PF rules with the new pension (NPS) rules. These NPS rules apply on a mandatory basis to all persons joining service in central (civil) ministries, non-civil departments, autonomous bodies, grant-in-aid institutions and Union Territories after 1 January 2004. These rules explicitly exclude all employees of the Indian Armed Forces as well as civil employees recruited prior to 1 January 2004. Over 100,000 employees have joined central (civil) service since January 2004 and are already covered by the NPS. Twelve state governments have also notified a revision in their respective pension and GPF rules and announced an identical pension scheme for their own new employees. Many other states are presently evaluating a similar option for their own new employees. Earlier this year, the Government established the Interim Pension Fund Regulatory and Development Authority (PFRDA) through an Executive Order and appointed a full-time chairman for the Authority. The central government also introduced the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005 during the Budget Session (2005– 2006). This Bill is meant to enable suitable legislation for converting the Interim PFRDA into a statutory regulator for the new pension system. Once the PFRDA Bill is passed by the Indian Parliament, it will also enable the government to offer this scheme under a well regulated umbrella, to the remaining working population which is not already covered by any legislated pension or PF scheme, on a voluntary basis. In this regard, the Asian Development Bank (ADB) provided technical assistance to the Indian Government, and embarked on the Indian Retirement Earnings and Savings (IRES) survey under a 12-month project commissioned to UNSW and IIEF in early 2004. This survey was administered on a random sample of 40,862 earners across 28 Indian States and was completed in November 2004. The IRES data was analyzed by a team of international and domestic experts engaged by the ADB to produce a set of policy recommendations for extending the NPS to the over 300 million unorganized sector workers. The ADB TA recommendations include public policy options and imperatives for achieving a broad-based coverage of voluntary pensions in India. The (six) TA reports include recommendations related to regulations, PFRDA organization and management structure, as well as market expansion and coverage, products, access and distribution. This ADB TA has provided a powerful demonstration of an evidence-led approach to public policy formulation. Over the last few months, the government has also made substantial progress on several important aspects of tax policy. A recent initiative is to establish an expert committee to propose a roadmap for implementing an EET treatment of taxation for financial savings. These initiatives of the government will have an important bearing on retirement savings under existing legislated and voluntary employer-led pension and superannuation plans. IIEF (which produced the OASIS Report in 2000) is presently assisting the government on pension policy analysis, research and technical assistance on implementation of the new DC pension system. Since 1998, IIEF has hosted an annual pension policy and business conference to provide an objective platform to the pensions policy, regulatory, services and research community to exchange ideas and views related to India's pension reform. This

2 conference is being jointly hosted with the Department of Economic Affairs (DEA), the Pension Fund Regulatory and Development Authority (PFRDA), and the Asian Development Bank (ADB). It is co-sponsored by India Pension Research Foundation (IPRF), Birla Sun Life Financial Services and Principal PNB Asset Management Company. This consultation is intended to provide an opportunity to examine the necessary policy and regulatory actions which will shape the retirement outcomes of India's citizens in the years to come. In this context, the conference will also provide an opportunity to the DEA and PFRDA to share the recommendations from ADB TA on pension reforms for the unorganized sector and to obtain useful stakeholder feedback on the same. The conference will also provide a public forum for a broad-based consultation on the proposed legislative framework under the PFRDA Bill, 2005. It will also provide a forum for obtaining direct feedback and comments on the draft regulations issued by PFRDA on 2 September 2005.

The 7th Annual IIEF Pension Policy Conclave, 2005 AGENDA DAY ONE: Tuesday, 27 September 2005 Opening remarks and backdrop to India's pension reform Gautam Bhardwaj Director, Invest India Economic Foundation The ADB's role in supporting pension reforms in Asia Renato M. Limjoco Lead Financial Sector Specialist, Governance, Finance and Trade Division Asian Development Bank The experience of South Asia with providing equitable, sustainable and broad-based pension systems and lessons for India Prof. Mukul Asher Professor, Lee Kuan Yew School of Public Policy, National University of Singapore The New Pension System In this session, Mr. Swarup will share the PFRDA's vision, scope and mandate, as well as the regulator's short and long-term developmental priorities in extending broad-based coverage of the NPS. The Chairman will also outline some of the key challenges for the NPS as well as the implementation road-map for this scheme. The following presentation by Mr. Sinha will highlight some of the key areas in which the NPS will ride on existing financial sector infrastructure and institutional capacity - especially in delivering low transactions costs, national-wide access, wellregulated intermediation services and competitively priced annuities. This presentation will also identify potential areas in which new developments in Indian finance may be desirable for efficient and speedy implementation of the NPS. Session chairman Dr. Rakesh Mohan Deputy Governor Reserve Bank of India Opening remarks by the session chairman NPS scope and PFRDA's immediate and long-term priorities D. Swarup Chairman Pension Fund Regulatory and Development Authority Implications of India 's financial markets on the NPS U. K. Sinha Joint Secretary (CM & PR) Department of Economic Affairs, Ministry of Finance, Government of India

2 Commentators C. B. Bhave Chairman and Managing Director, National Securities Depository Limited Dr. Ajay N. Shah Consultant Department of Economic Affairs, Ministry of Finance, Government of India Shikha Sharma Managing Director, ICICI Prudential Life Insurance Company Limited Sanjay Sachdev Managing Director & CEO, Principal PNB AMC Private Limited Questions Summary and closing remarks by the Chairman Fiscal imperatives for India's pension reform Promises by the State about payment of pension in the future are much like debt. For the purpose of fiscal planning and analysis of pension reforms, it is important to compute the implicit pension debt (IPD) of the country. India's IPD comes about through the current pension promises to existing workers and pensioners of the central and state governments, as well the funding gap in the EPS and other DB pension schemes of government owned enterprises which self-provide annuities. Recent attempts at computing a part of the IPD of the Indian State by IIEF using IRES data suggested an IPD of 55.88% of GDP. In this session, Mr. Bhardwaj will present an updated estimate of India's implicit pension debt based on IIEF's analysis of some new data. Chairman C. S. Rao Chairman, Insurance Regulatory and Development Authority Opening remarks by the Chairman Towards estimating India's Implicit Pension Debt (IPD) Gautam Bhardwaj Director, Invest India Economic Foundation Discussants Prof. B. B. Bhattacharya Vice Chancellor, Jawaharlal Nehru University Michael Wattleworth Senior Resident Representative International Monetary Fund V. S. Senthil Joint Secretary (State Finances) Department of Expenditure, Ministry of Finance, Government of India

3 Dr. Robert Palacios Senior Pensions Economist, The World Bank Questions Summary and closing remarks by the Session Chairman State Government pension policy outlook: Interaction with Finance Secretaries This session on pension reforms and NPS implementation will include (a) an update on state pension reforms by senior officials of state governments and (b) and open Q&A session with the PFRDA, Ministry of Finance, DPPW and CPAO on NPS adoption. Update on NPS adoption and pensions policy outlook by State Finance Secretaries

Chairman D. Swarup Chairman Pension Fund Regulatory and Development Authority Panelists I. M. G. Khan Additional Secretary Ministry of Personnel, Public Grievances & Pensions, Government of India U. K. Sinha Joint Secretary (CM and PR), Department of Economic Affairs, Ministry of Finance Government of India V. S. Senthil Joint Secretary (State Finances) Department of Expenditure , Ministry of Finance, Government of India Vandana Sharma Chief Controller (Pensions) CPAO, Department of Expenditure, Ministry of Finance, Government of India Gautam Bhardwaj Director Invest India Economic Foundation Close of sessions for Day One

4 DAY TWO: Wednesday, 28 September 2005 Extending voluntary pensions to the informal sector: Key ADB TA recommendations (2005) The following two sessions will focus on the key recommendations from the Asian Development Bank's Technical Assistance to the Government of India under a Project commissioned to UNSW and IIEF. Under this 12-month TA, a national retirement earnings and savings survey was administered on a random sample of 40,862 earners across 28 Indian States. The final recommendations from this project were recently submitted by ADB to the DEA. These were based on an intense analysis of the survey findings, comprehensive feedback from industry and policymakers, and peer reviews by leading global and domestic experts. In the first of these two sessions, Dr. Christopher Butel, project director for this TA and the key architect of the survey, will present an overview of the key recommendations for DEA and PFRDA in extending voluntary coverage of contributory pensions in the Indian context. Dr. Butel will also provide some evidence of retirement outcomes for India in a no-change scenario. In the second session, Dr. Butel will deal with a narrower subset of the recommendations - especially those dealing with products, access, gender and financial literacy. Both sessions are aimed specifically at obtaining direct feedback on these recommendations from a variety of key stakeholders. Session chairman D. Swarup Chairman Pension Fund Regulatory and Development Authority Opening remarks by the session chairman NPS and the unorganised sector Dr. Christopher Butel Project Director, ADB Unorganised Sector Pension Reforms TA Commentators S. K. Mitra Director (Financial Services) Aditya Birla Group of Companies Gary Bennett Managing Director and CEO Max New York Life Insurance Company Sanjay Prakash Chief Executive Officer HSBC Asset Management (India) Private Limited Questions Summary and closing remarks by the Chairman

5 Key ADB TA recommendations (2005): Continued Chairman U. K. Sinha Joint Secretary (CM & PR), Department of Economic Affairs, Ministry of Finance, Government of India Opening remarks Pension markets and products in India Dr. Christopher Butel Project Director, ADB Unorganised Sector Pension Reforms TA Commentators Padmini Gopinath Secretary - Postal Services Board and DDG (Financial Services), Department of Posts, Ministry of Communications & IT, Government of India Arbind Modi Joint Secretary, Department of Revenue, Ministry of Finance, Government of India Jon Robinson Managing Director, Vanguard Investments Singapore Questions Summary and closing remarks by the Chairman Strengthening existing retirement provisions: Legislated Pension and PF Benefits While several new initiatives are under active consideration for retirement benefits of civil servants and informal sector workers, very little progress has been made on the legislated, mandatory pension and provident fund provisions which cover a substantial population of workers in the formal sector. In this session, Prof. Mukul Asher will discuss some policy choices for effecting parametric and systemic improvements in the structure, administration and governance of these plans. In this context, Prof. Asher will also present a summary of the experiences of some other countries in reforming publicly managed pension systems and draw some lessons for India. Session Chairman Dr. S. Narayan Former Advisor to the PMO Opening remarks by the session chairman Policy proposals and actions for providing sustainable retirement outcomes under legislated pension and PF provisions Prof. Mukul Asher Professor, Lee Kuan Yew School of Public Policy, National University of Singapore

6 Commentators A. Viswanathan Additional Central Provident Fund Commissioner, EPFO, Ministry of Labour, Government of India S. V. Prasad Chief Executive Officer, Birla Sun Life Asset Management Company S. P. Subhedar Senior Advisor, Prudential Corporation Asia Questions Summary and closing remarks by the Chairman Strengthening existing retirement provisions: Private pensions and employer-led plans The last technical session will examine the role of public policy and the policy outlook in encouraging employer interest and participation in maximizing the retirement outcomes of their employees. The session will also examine the EET framework of taxation of financial savings including pensions announced by the Union Finance Minister during the 2005–2006 Union Budget. In this session, Dr. Rajiv Kumar will discuss tax policy implications for voluntary personal pensions and occupational PF and superannuation plans offered by private firms, issues of excluded and exempted provident fund trusts, as well as governance and regulatory gaps in these arrangements. Session chairman Dr. John Piggott Dean Centre for Pensions and Superannuation, UNSW, Australia Opening remarks by the session chairman Designing public policies to encourage voluntary coverage of private and occupational pension plans Dr. Rajiv Kumar Chief Economist Confederation of Indian Industry Commentators Rajendra P. Chitale Managing Partner, M.P. Chitale & Co. Deepak Satwalekar Managing Director HDFC Standard Life Insurance Company Limited

7 Dr. R. Kannan Chairman EET Committee, Appointed Actuary, SBI Life Insurance Company Limited Questions Summary and closing remarks by the Chairman Strengthening existing retirement provisions: Private pensions and employer-led plans The last technical session will examine the role of public policy and the policy outlook in encouraging employer interest and participation in maximizing the retirement outcomes of their employees. The session will also examine the EET framework of taxation of financial savings including pensions announced by the Union Finance Minister during the 2005–2006 Union Budget. In this session, Dr. Rajiv Kumar will discuss tax policy implications for voluntary personal pensions and occupational PF and superannuation plans offered by private firms, issues of excluded and exempted provident fund trusts, as well as governance and regulatory gaps in these arrangements. Session chairman Dr. John Piggott Dean Centre for Pensions and Superannuation, UNSW, Australia Opening remarks by the session chairman Designing public policies to encourage voluntary coverage of private and occupational pension plans Dr. Rajiv Kumar Chief Economist Confederation of Indian Industry Commentators Rajendra P. Chitale Managing Partner M.P. Chitale & Co. Deepak Satwalekar Managing Director HDFC Standard Life Insurance Company Limited Dr. R. Kannan Chairman EET Committee, Appointed Actuary, SBI Life Insurance Company Limited Questions Summary and closing remarks by the Chairman Close of conference

Recent Social Security Reforms In Selected Asian Countries
Mukul G. Asher Professor National University of Singapore (NUS)
Presented at The 7th annual Indian Pension Policy Conference September 27-28,2005, New Delhi.

Introduction Recent Reforms in China Recent Reforms in Southern Asia Recent Reforms in Hong Kong Concluding Remarks


Globalization has made safety nets essential for cushioning the burden of restructuring, increasing legitimacy of reforms, and for risk taking by individuals and firms. There has been considerable debate and experience with social security reform but no single idea, system or model has emerged even among Asian countries.

Social security reform may be viewed from the perspective of pension and provident fund organizations and from a systemic perspective involving all the different components.


Five core functions of Provident and Pension Funds Organizations (Ross, 2000) 1. Reliable collection of contribution/taxes, and other receipts. 2. Payment of benefits for each of the schemes in a correct way without any side-payments. In case of pre-retirement loans, ensuring their timely repayment. 3. Secure financial management and productive investment of provident and pension funds assets.


4. Maintaining an effective communication network, including development of accurate data and record keeping mechanisms to support collection, payment and financial activities. 5. Production of timely and policy relevant financial statements and reports. .


• The core functions are interrelated. • While lot of the attention and debate focuses on the investment function, the importance of performing noninvestment functions cannot be overemphasized.

• Much of the recent social security reform has focused on improving the performance of the core functions and benchmarking them against international best practices.
From a systemic perspective, the system should be • Adequate ( both in terms of coverage and against various risks). level of protection

• Affordable (from individual, business, fiscal and macroeconomic perspectives) • Sustainable ( should have tight strategy, but flexible implementation to financially sustain the system over a period of 70 years or more). • Robust ( must be able to withstand macroeconomic and other shocks)

The recent reforms in southern Asia have also focused on
Civil service pension reforms
• Primarily increasing the funding through contributions, setting aside dedicated sinking funds which are then invested in the capital markets in a professional manner with high level of importance attached to fiduciary responsibility ( Some aspects of this trend are evident in Malaysia, Sri Lanka, Pakistan and Thailand). • Revising the benefits formula linking it with overall Civil Service reform, including the New Employment contract.

Occupational pensions
• The trend has been towards expanding the role of employer based voluntary occupational pension plans, with tax advantages subject to a ceiling. • Professional management of funds through the capital markets. • Foreign pension fund managers being invited( China) ;and international diversification is increasingly considered ( Malaysia and Thailand). • New legislation is being enacted to facilitate this tier of retirement plans (China).

The relatively neglected areas are Governance structures Regulation Systemic perspective. This presentation provides an overview of recent social security reforms in rest of Asia.

Recent Trends in China/1
Demographic challenges in China severe, accentuated by one-child policy. China’s population above 65 years in 2000: 88 million, by 2030 : 237 million.
• China will experience demographic burden i.e. declining share of working age population to total population by 2015, about a decade from now ( India will reach that stage only around 2045).

Retirement age is much lower at 55(in some cases 50 for women).

Three phases of social securityPhase I: Pre-Reform: “iron rice bowl” – benefits including pensions and health care underwritten by the state. This system worked reasonably well given the premise of central planning and comprehensive state ownership.

Recent Trends in China/2
Phase II: Reform period till late 1990s: Shift to state owned enterprise (SOE) based system. So reforms in SOEs and social security are tied together. Each state enterprise was asked to make sufficient contributions for benefits mandated by the state. But uneven capacity and uneven compliance created severe limitations. Labor mobility across state enterprises was severely hampered due to very limited portability under this system.


Recent Trends in China/3
Phase III: Since late 1990s Attempts to create a national system – but it is work-in-progress. Goal is clear but tactics take into account political and economic constraints. Currently consolidation (or centralization) is upto municipal or provincial level; participation by state firms is incomplete. This creates inter-provincial labor mobility – portability issues.

Recent Trends in China/4
The challenges are accentuated by poor record keeping and limited financial and capital markets. Strong resistance by richer municipalities/provinces to undertake burden sharing of less richer areas. Large inequalities (China’s Gini coefficient is in the range of 0.45-0.48) poses additional challenges in creating national uniform system. So does the increasing role of the private sector enterprises who are reluctant to join state system due to perception that their contributions will go towards financing deficits (benefits paid less contributions received) of the current retirees.

Recent Trends in China/5
Selected Data:
No of retirees: 38.8 million in 2000 Worker-to-retiree ratio: 3.5:1 in 2000, 30:1 in 1978 This will be reduced further. No of participants in Basic Retirement System:
• 116.5 million in 2003 (in 1999, 73 million of these with individual accounts. But these are empty.) • 620.0 million is China’s labor force. • Therefore, low coverage in the formal system. • Social Security Fund: 124 billion yuan in 2002.

Recent Trends in China/6
Contribution rates as % of payroll vary by provinces. So rate unification has not occurred. Examples: Chengdu 26% (employer 20%), Hangzhou 29%, (employer 22%);Beijing 28%,(employer 20%); Tianjin 31%, (Employer 25%); Shanghai 32.5% (Employer 25.5%) Rural Old-Age Pension Scheme is voluntary participation decreased from 65.9 million in 1996 to 54.6 million in 2002. 1992-2005 period- average annual pension payment per participant was less than 90 yuan. This is low.

Recent Trends in China/7
China’s vision is to bring about a Multi-tier social security system along the lines recommended by the world banks’ five pillar framework. China is encouraging occupational pension plans as a part of this strategy; inviting foreign pension funds to participate. The investment will be diversified among various assets- such as equity and bonds, both on domestically and internationally.

Recent Trends in China/8
Individual retirement savings accounts (IRAs) are also being considered by China. Weak links in case of china are regulation and limitations of the domestic financial and capital markets.


Recent Trends in China/9
Key challenges in China’s Pensions:
Enhance unification Improve recordkeeping Diversify investments currently mainly in government bonds and bank deposits Increase coverage Changes requiring political decisions

Unify pension age for men and women Reduce replacement rate Increase age at which pensions are received.

Southern Asia/1
Among India's immediate neighbors, Sri Lanka has recognized the need for social security reform, though the progress has been slow and uneven. The newly recruited civil servants have been asked to contribute towards their pensions, but the DB nature of the pensions has remained unchanged. The national provident fund reform proposals designed to rationalize the governance structure and detail provisions ( limitations on preretirement withdrawals) are under consideration.

Southern Asia/2
The pension reform office in the ministry of finance has been set up and there are plans for a regulator for the pensions sector, under a super regulator along the lines of U.K. and Australia. Limitations of Sri Lanka’s financial and capital markets remains a major challenge. If Mumbai progresses as a regional financial centre , it could attract some of the pension funds from Sri Lanka.

Southern Asia/3
In Pakistan and Bangladesh , the reforms appear to have centered around civil service pension reforms, essentially along the lines of Sri Lanka. The reforms are very limited as far as other tiers are concerned.


Southern Asia/4
• exhibit considerable divergence in their social security systems. Philippines, Thailand, and in the proposed legislation in Indonesia there has been acceptance of principle of social insurance and social risk pooling. Thailand since 2004 has unemployment insurance. also introduced

Southern Asia/5
Singapore however has continued to rely almost exclusively on mandatory savings schemes administered by Central Provident Fund (CPF). Malaysia also relies on mandatory savings scheme for the private sector employees, but its civil servants receive pension on a defined benefit basis (though there is no automatic indexation) without making any contributions. Pension costs are financed through the budget. In Indonesia and Thailand, civil servants do make contributions towards their pensions, but these (and investment income) cover less than a quarter of pension benefits, the rest is derived from the budget. 26

Southern Asia/6
In any mandatory savings or funded system there is an accumulation phase and a payout phase (Figure 1). Usually, the accumulation phase receives the most attention. Many policymakers believe that once the notional retirement age at which withdrawals (usually lump sum) can be made is attained, their responsibility is complete. This is not appropriate given rising life expectancy, particularly at age 60.Longevity risk protection must be addressed.


Figure 1 Accumulation and decumulation phases of DC schemes Cumulative
Balances $

Accumulation Phase

Decumulation phase


Withdrawal Age

Retirement Period

Cumulative Balances = Net contributions (contributions minus withdrawals), plus interest credited on accumulated balances. Decumulation phase: the funds accumulated can be spent rapidly or slowly. Death may occur before the funds are exhausted or reverse is also a possibility. So need to protect against longevity risk. As it is the purchasing power of the funds that is relevant, protection against the inflation risk is also desirable. 28 Source: Author

Table 1: Key Provident and Pension Fund Organizations and Indicators in Southeast Asia/1
Country Organizations Contributors as Percent of Labor Forcea Contribution Rate (2004) Wage Ceiling (2000) Member Balances (USD Billion), Percent of GDP 55.0, 57.8 (2002) NA 3.1, 4.0 (2003) 4.4, 5.7 (2003) 62.3, 65.1 (2003) NA


Employees Provident Fund (EPF) Government Pension Fund, Malaysia (GPF) Social Security System (SSS) Government Service Insurance System (GSIS) Central Provident Fund (CPF) Government Pension Fund, Singapore (GPF)

48.7b NA

23.0 NA

No No


20-25c (2003) 4.5 (2003)

9.4 21.0

P 15,000 per month No wage ceiling $5,000 month (will be $4,500 from January 2006) B15,000 month Yes


60.0d (March 2004) NA

30.0f NA


Social Security Organization (SSO) Government Pension Fund, Thailand (GPF)

21.2e (2003) 3.5(2003)

6.0 6.0

16.0, 12.4 (2002)

Table 1: Key Provident and Pension Fund Organizations and Indicators in Southeast Asia/2
a Figures in brackets refer to year to which data refers. b Includes 4017 foreign workers. c Membership in the SSS is 23 million but the active contributors are 6-8 million. d Foreign workers are around 25% of the labor force and are excluded. e The SSO coverage is overstated as the figure refers to members rather than active contributors. If the provident funds of SOE’s are included, the coverage rate may be as high as 25%. f This rate applies to those below 55 years of age. Lower rates apply to those above 55 years. Sources: Information obtained for official sources in each country.

Southern Asia/7
Except for Thailand, multi-tier system of the type suggested by the World Bank have not emerged in ASEAN-5. Even in Thailand, the first pensions to private sector workers will not be paid until 2013. Thailand, thus has scaled its system keeping affordability in mind.


Southern Asia/8
Thailand’s Social Security Organization (SSO) now provides comprehensive coverage of various shortterm and long-term risks including old age pension, disability, sickness and maternity, work injury, health benefits, survivors benefits and unemployment
But Thailand is unusual in providing such an array of benefits under a single system. Thailand’s old age pension arrangements are shown in Table 2.

Table 2: Social Security System of Thailand/1
Mandatory Defined Benefits Pension Central Government Officials Central Government Regular Employees P U B L I C Central Government Temporary Employees Local Government Officials Government-related Organization Employees State Enterprise Employees Salary-type Employees P R I V A T E Wages-type Employees Self-employed Informal sector Teacher and headmaster in Private School Lump sum Mandatory Defined Contributions Pension Lump sum GPFc Provident Funda

Original Pension Original Pension -


Provident Funda

Original Pension -

Either Original Pension or Provident Fundb Old-Age Pension Old-Age Pension Private Teachers’ Provident Fund


Table 2: Social Security System of Thailand/2
Notes: a As mandated by government policy b Some state enterprises had replaced the original pension with provident fund. c GPF refers to Government Pension Fund. Source: Kanjanaphoomin (2004)


Southern Asia/9
The coverage and the adequacy issues remain important in ASEAN-5. Coverage is shown in Table 1.Informal sector coverage has been particularly challenging. Adequacy issue is experience (Table 3) illustrated by Singapore’s

There is also an issue of how to invest accumulated balances in economically productive, growth enhancing investments.

Southern Asia/10
Both Thailand and Malaysia are planning to permit their social security organizations to invest abroad, as accumulation of balances has become too large to be absorbed domestically without unacceptable risk. But country must have institutions and systems to invest abroad if fiduciary responsibility is to be fulfilled. In Singapore, in a fact 100% of the CPF balances are invested abroad. This is however done in a nontransparent and non-accountable manner, posing very high political risk.

Southern Asia/11
As far as governance structure is concerned, finding persons who are both capable as well as independent minded is proving to be a major challenge in ASEAN and in rest of Asia. In none of the ASEAN countries is there a pension regulator. Thus system wide perspective as well as professionalism are not always easy to achieve. But these are critical as pensions represent a 70 or more years of financial contract, particularly when family (or survivor’s benefits are provided).

Southern Asia/12
The actuarial aspects of pensions and of health care are different. So if health care is also included, professionalism becomes even more essential. In general, the burden of financing health care is severely underestimated. In OECD countries, this may be even more challenging than pensions.

Table 3: Singapore: CPF, Sensitivity of Results to Potential Policy Changes/1
A Total Wealth ($000) 1. Base Case CPF Changes 2. Both CPF Accts ROR up from 0% /1.5 % to 5% real 3. % to Special CPF Acct up from 4% to 8% 4.CPF contribution ceiling held at 0% nominal instead of 0% real 5. CPF contribution rates lowered from 40% to 30% HDB Changes 6. ROR on HDB property falls 4% real to 0% real 7. ROR on HDB property 4% real->10 years, 0% real thereafter 8. ROR on HDB property 0% real->10 years, 4% real thereafter 9. HDB resale levy falls from 22.5%/25% to 0% B Proportion in Housing C Replacement Rate Earnings Subsistence D E IRR on Property

1774.3 2052.6 1800.3 1598.5 1604.6

75% 65% 74% 83% 83%

28% 34% 30% 17% 14%

296% 359% 319% 186% 148%

582% 4.60% 5.34% 5.23% 4.61%

768.5 749.1 1797.6 2296.2

36% 37% 74% 77%

32% 30% 30% 34%

339% 322% 316% 364%

0.77% 0.47% 6.04% 7.42%

Table 3: Singapore: CPF, Sensitivity of Results to Potential Policy Changes/2

Notes: Author’s (McCarthy et al.) calculation; assumes male head of household married to same age nonworking wife. Source: McCarty, Mitchell and Piggott (2002).


Recent Reforms in Hong Kong/1
Hong Kong introduced Mandatory Provident Fund (MPF) in December 2000. It is supervised by the Mandatory Provident Fund Schemes Authority (MPFA) which was established in September 1998, as a quasigovernment body. MPFA has considerable freedom in appointing staff and fixing salary and other employment conditions of its staff. The MPF is a mandatory near universal (84% of the workforce is covered) DC retirement plan.

Recent Reforms in Hong Kong/2
Each employer and employee contributes 5% to the MPF scheme, for a total of 10%. The maximum wage ceiling for contributions is 20,000 dollars per month. Total contributions and income earned can be withdrawn as a lump sum at age 65. Thus it is a mandatory savings scheme which does not address longevity and inflation risks.

Recent Reforms in Hong Kong/3
An MPF scheme (employer selects the scheme) may consist of one or more constituent funds each with its own investment policy. As of 31 January, 2005, there are 47000 approved MPF schemes comprising 324 constituent funds. A member may allocate its contributions among various constituent funds. An MPF scheme must ensure that at least 30% of its exposure is in HK$ denominated assets.

Recent Reforms in Hong Kong/4
The investment regime permitted is quite liberal, but within prudential guidelines. The real annual rate of return on MPF funds after expenses ,has been about 5% since its inception. In addition to MPF, Hong Kong relies on social assistance to address old age income security. This requires healthy fiscal position and effective service delivery mechanisms.

Concluding Remarks /1
The pension economics and management is complex and subtle requiring sustainability over many decades. While political leadership and decisions are important, the key is to ensure that there is high degree of professionalism and systemic perspective. There is a strong case for a multi-tier system under which retirement finance is obtained from many different sources, including participation in labour force, family and community and conversion of non-financial assets such as housing and gold into income flows. No single pension model has emerged as clearly superior in all circumstances. Therefore, contextual adaptation and management of general principles and best practices is essential.


Concluding Remarks /2
There are considerable variations in the philosophy, coverage, investment policies and performance, design of schemes, governance structures, degree of professionalism and adequacy of benefits among Asian countries. The pensions sector requires strong government regulation. For most Asian countries , given their level of development there is a strong case for dedicated pension regulator. However as distinctions among financial service providers becomes more blurred, greater coordination among regulators will be needed and eventually , a super regulator covering the whole financial and capital markets sector , may become necessary.


Concluding Remarks /3
In countries such as China, transition (and legacy) issues are a major challenge. This is also the case with civil service reforms in countries such as India and Malaysia where existing civil servants do not contribute towards their pensions.





Much of the pension debate in India continues to focus on means rather than ends The means being the machinery of the NPS management architecture and the respective roles of public and commercial sector players and the associated regulatory requirements One outcome of this has been to push the ends – the social policy dimension of the NPS - into the background The NPS is about every day Indians and how they can be provided with an opportunity for a more secure retirement In both presentations today I will focus on the NPS customer dimension that has been a major focus of the ADB project team’s work Unless the customers needs and preferences are kept firmly in view the NPS like earlier attempts to seed private pensions in India is likely to founder

What are the consequences for everyday Indians if the NPS fails ?
As part of its work the ADB project team undertook an assessment of existing retirement support systems in India as one important input for profiling the potential NPS customer base What we find is reasonably bleak picture Our hypothesis was that under present policy settings support in old age is sourced mainly in one or more of the following: - private savings (including in existing voluntary pension products) - traditional family support - social assistance programs offered by central and state governments (National Old Age Pension Scheme) - extending working life

Private Savings
Project data indicate that existing private savings levels for those approaching retirement (>age 50) are inadequate to provide even poverty line incomes for more than 15 % of the group For those with savings active retirement planning is an objective for only 5% of respondents (and only 10% in the case of the PPF) Mandated pensions will accommodate of the order of a further 15% Existing voluntary pensions have captured only a small market to date (< 3%) of earners and most of those in schemes are participating for investment rather than retirement income reasons About one quarter of workers (26%) have no private savings whatever For those with inadequate savings (over two thirds of all workers) family support will remain an important support buffer for the immediate future

Extended Family Support
The data show that approximately one half of workers in India are not confident that family members will support them financially in older years and for younger workers the number is significantly lower The likely future scenario is that family support mechanisms will continue to decline and are likely to be progressively marginalised for successive generations Given the prominent role of family support mechanisms in South Asia these developments should properly be regarded as approaching crisis point but because that crisis will not become transparent for 10 - 20 years it is not receiving the attention it deserves Women generally and widows in particular are in a especially vulnerable situation Only 13 % of India’s earning population are women 85% of these are in informal sector employment They earn less than men They are 10 time less likely to own property than men 8% of all women in India are widows (>45 million women) Only 1 in ten widows remarry Most widows can expect to spend over 15 years as widows These observations highlight the importance of effective NPS survivor benefits


NOAPS currently supports only a small fraction of aged persons over 65 ( some 5%) and payment levels are very modest There are known to be take-up problems with NOAPS and ADB project data were tested to ascertain what would be the level of coverage if all eligible persons in fact received the payment - Our estimate is that with a 100% take-up of the payment perhaps 8%-10% of those over age 65 could receive the payment under existing qualifying conditions The prospect of Governments having the financial capacity in future to improve coverage and payment levels under NOAPS must be regarded as a fragile assumption

Extending Working Life

Many Indians currently employ the coping mechanism of continuing in employment into their older years where this opportunity is present This is particularly true in the agricultural economy Economic restructuring is likely to shrink opportunities of this sort and particularly in the rural economy where employment growth is already stagnant

It is clear from the project data is that most of the unorganised sector audience is unsophisticated and this will be a major challenge for NPS providers Two thirds of respondents have not given retirement income needs any thought whatever Financial literacy is low – only half of respondents know the current value of their savings – 4 in 5 believe that the government guarantees their bank savings deposits and only 1 in six register the inflation rate as important investment information There is little familiarity with the pension concept In excess of one quarter have no dealings with financial institutions Three important conclusions the Project group has drawn from these observations are: Subscribers require strong advisory support to make informed decisions about the NPS options NPS regulations should not assume subscriber (financial) literacy and set high standards to protect subscriber savings Systems need to be in place to encourage subscriber discipline in maintaining contribution patterns over time

Why Should I buy a pension when what I really want is a new two wheeler?
Voluntary pension systems operate under a completely different logic to mandated social insurance arrangements Its also true to say that as a nominal investment option pensions suffer many presentational disadvantages compared to higher earning more liquid investments Like any other product on offer in the market consumers must be convinced of the merits of this purchase over other products before they buy The evidence in India from the ADB data (as elsewhere) tells us that voluntary pensions are hard to sell to the young (under 30) as they see more pressing spending priorities and retirement is still a remote and unfamiliar concept Interest in retirement planning comes firmly into focus in middle age but for many the realisation that they have not saved sufficiently for retirement can come too late for them to build up meaningful pension savings The prime audience for voluntary pensions in marketing and outcome terms therefore is the 30 something to 40 something age group and the more intensive NPS recruitment strategies need to aim up at this group Success with the NPS therefore will hinge on well constructed and targeted marketing strategies

Hunt where the ducks are!
The fundamental driver of voluntary pensions is capacity to pay Proceeding with voluntary pension reforms without some good sense of who is able to afford regular long-term contributions is a recipe for failure PFRDA needs this understanding to begin the task of developing the NPS market as do the NPS commercial partners to give confidence that the necessary institutional investments that will be required will return a dividend At the onset of the project there were few data to assist in estimating capacity to pay – they had to be created

Estimating Capacity to Pay
The project commissioned a major national sample survey of just on 41,000 respondents and collected a large range of data for earning members of the Indian workforce on demographics, income & expenditure, labourforce attachment , savings & investment practices and a a range of qualitative data to test perceptions on pensions The resultant data is I believe unique in India and breaks new ground in its capacity to profile consumer savings and investment habits and preferences It has wider applications outside of the pensions area for the banking and insurance sectors in particular and I invite those of you who have not already done so to explore the data for more general business purposes An important data field was to create a surrogate for capacity to pay regular and meaningful pension contributions Our hypothesis was that pension contributions would be sourced mainly in one or more of the following: - redirecting discretionary expenditure - redirecting existing savings preferences - future real increases in earnings What do we see in the results?

Significant Numbers of Unorganised Sector Workers are Ready to Join the NPS
Some 140 million earning members of the Indian workforce believe that they presently have some level of uncommitted discretionary income i.e. not committed to savings or essential current consumption To this number we applied three filters: 1. who in the 140 million has uncommitted income sufficient to finance meaningful pension contributions? 2. Who in the 140 million is strongly attracted to NPS as a retirement savings plan? 3. Who in the the 140 million is in the age band 30-50 years? Those who satisfy all three tests we called the prime NPS market - some 20 million unorganised sector workers We believe that a well marketed NPS can expect to capture an initial market of at least that order

ADB Data are a Good Staging Point
ADB data are a snapshot only of capacities to pay The Indian economy is on a long-term growth path and real earnings can be expected to lift as a result What is less clear is the pace at which this will occur and in which occupational groupings Bringing transparency to this dynamic will be important for growing the NPS market post-implementation What’s required therefore is time series to monitor earnings movements on a regular basis to capture a share of real increases for pension contributions before those earnings are committed to other purposes and to identify new earner groups whose earnings lift to the necessary levels for contribution purposes - A draft survey instrument for this purpose has been included in the Project Reports

1. India is in transition from old age support systems based on the family to a new reality From the data created in the ADB project that transition is fermenting at a faster pace than perhaps many commentators think Certainly for the generation of workers now aged under 40 the balance between family support and self-support in retirement is likely to fall heavily in the latter direction and for the moment workers are poorly prepared for this eventuality Policy makers must correctly anticipate the course of the transition so that adequate counter measures are in place at the appropriate time The NPS will be an important policy tool in this process

2. The data clearly indicate that without guidance, encouragement and support most Indian workers will not save sufficiently for their old age and the capacity of the public purse and the labour market to mend broken fences will if anything become more limited than is presently the case In most countries the mechanism chosen to confront this scenario is publicly sponsored pension schemes India’s experience in this regard is not unique – it is the experience of most countries for those who care to read the history However because pension systems take a long period of time to mature (25-30 years) and deliver the intended benefits to subscribers there is no room for compliancy and implementation of the NPS should be regarded as an urgent social policy priority for the next generation of Indian workers

3. There is an understandable concern in both government and industry circles to plan carefully and optimise the NPS design from the onset I believe that the ADB project has positioned the GOI and the PFRDA to make good judgements in this regard Perfection however is illusive and accepting that trade offs may be required to to get the NPS to the starting line will be important Certainly, unduly delaying implementation to cross the I’s and dot the T’s will bring with it a price in the future for those unorganised sector workers who as a result are denied the opportunity to join the NPS at an earlier time The experience elsewhere in the world is that pension systems are dynamic and need to be adapted and restructured over time to meet unforseen developments and improve performance - This undoubtedly will be true of the NPS also


What is the right product?

Flexibility in time and amount of deposit

Low tax benefit

4 3 2 1

Account in your own name

Paid to nominee if you die or after retirement

Portability of the account

Pension payment for the rest of your life Save in this acount till your old age

Earn Interest on your deposits Opportunity to change your choices



• The idealised retirement pension product design all workers are covered by the arrangements participation is mandatory costs are shared by workers, employers & government contributions are fully vested and preserved throughout the full working life of the contributor benefits deliver an adequate earnings replacement rate sufficient to maintain living standards in retirement and the current international trend is a retreat from one or more of these features because of financing pressures

• In practice this has not been comprehensively achieved

• With voluntary pension schemes the central issue is what balance to
strike between public policy objectives and achieving high pension take up

- Economic: Sustainable public spending - Financial: Prudent and orderly investment practices - Social: Wide coverage & adequate retirement incomes

• There are many difficult judgements that need to be exercised here
in India’s case including political judgements to product design

• The ADB products expert accordingly followed an options approach

• Summary of Recommendations • Accumulation Phase:
- Four investment choices (conservative/moderate/balanced/lifecycle) - Default option – conservative

• • • • • • •

PFRDA regulated fees with full disclosure rules Minimum balance rules that protect against fee erosion of small accounts Level playing field for tax treatment of pension and competing investments Level playing field for Pension Fund participants Investment spreads limited to three PF’s at any one time One free switch permitted annually Consider subsidies for contributors whose incomes are too low to benefit from tax breaks

• Benefits Phase
- Minimum preservation age of 60 years - Mandate life cover as a survivor benefits scheme (Rs. 100K cover on a reducing scale from age 30 to zero at age 60 with premiums debited to Tier 1 accounts) - Accumulations above a stated amount to be annuitised as a life annuity - Term annuities to be offered and indexed annuities available under market conditions for high worth retirees - For those with insufficient balances to purchase annuities phased withdrawals to apply

• Subscriber Services - Plain language advising on investment options and PF performance Accessible and speedy complaints resolutions mechanism to be instituted Financial advisory services to be offered

Growing the NPS market


• NPS is to be based on voluntary

participation with minimal public subsidies for contributors - Participation levels therefore will be driven principally by consumer sentiment

NPS pensions will be sold not bought

• Savings preferences presently operate
over relatively short-term time horizons and are investment driven - A psyche change is required for voluntary pensions to gain a foothold in the market

Psyche change must be actively cultivated

• Pension products have a low profile
presently among Indian consumers
- Effective profiling of pension utilities for workers is required - Achieving this will require long term commitment

• Lack of data on the savings capacities and
preferences of workers for informed decision making

- Evidence led decision making is not possible until the necessary data sets are created

ADB data is a good beginning but more is required

1. Assess the potential size of the market in India
for NPS pensions at the present time 2. Provide a facility for segmenting that market 3. Provide guidance for shaping NPS marketing and sales strategies

• Total size of the Indian labourforce = 425 million • •
(excludes child labour) Of these 85% (363million) are paid workers Of the 363 million 5.5% ( 20 million) are ready immediately to join the NPS based on three criteria: 1. Financial capacity to pay adequate pension contributions (based on reducing discretionary expenditure and not redirecting existing savings) 2. High interest in the pension option 3. Aged 30 to 50 years

• 20 million unorganised sector workers are ready immediately to join
the NPS if effective sales and marketing tools are put in place

• The 20 million estimate is conservative as:
1. Some older and younger workers will join 2. Some contributors will switch existing savings to pension contributions

• Importantly the composition of the 20 million includes significant

numbers of rural workers as well as urban workers and includes workers on modest incomes (<Rs. 30000 a year) as well as higher income groups

• Future NPS growth needs to focus on capturing real increases in

earnings and time series data needs to be created for this purpose

• • • • • • • •
Farmers = 5.8 million Small Retailers = 5.3 million Street Vendors = 0.7 million Self-employed = 3 million Small/medium manufacturers = 0.3 million Skilled/semi-skilled wage earners = 2.5 million Salaried employees in small firms = 1.5 million Others = 0.7 million

• Over 50% of these have incomes of less than Rs. 100K a year.

• 19% have neither a bank or Post Office savings accounts • 8% bank exclusively with the Post Office • 56% bank exclusively with banks (one in eleven of whom have • •
accounts with more than one bank) 17% have both Post Office and bank savings accounts and 44% are customers of life insurance institutions

• Conclusions

- banks and life insurers are positioned be the key players in cross selling - nearly 20% of the prime audience is outside the ambit of cross selling opportunities

ENTERING THE MARKET: Public Confidence
INSTITUTION India Post Nationalised Banks Regional Banks Cooperative Bans Private Banks Chit Funds LIC Private Insurers Mutual Funds Employers Percent That Actively Mistrust the Institution 0-2% 0-2% 7-30% 14-32% 45-57% 26-53% 1-9% 35-58% 10-35% 31-38%

ENTERING THE MARKET The Role of Commissioned Agents
• Sales efforts based on agent sales forces are problematic
for the NPS that must operate on small margins to promote participation by lower income groups important

• Seeking alternatives to existing practices will be • For NPS commercial partners there may be opportunities
to explore this issue more generally for other financial products where commission taking is causing problems

ENTERING THE MARKET: Public information and Education The Thematics of the NPS
1. 2. 3. 4. 5. 6. 7. 8.
People may fall into poverty in old age as they are not saving enough presently to maintain living standards in retirement (already resonating) There will be less joint and extended family support for the aged in the future (already resonating) A comfortable retirement is worth saving for (already resonating) Pensions are a means of providing financial security for wives and other family members of contributors (not resonating) Longevity is extending and with it the need to save more for old age (not resonating) The financial capacity of Government to financially support the aged will continue to be limited (not resonating) Opportunities for extending working life into old age may be more limited in the future (not resonating) Economic restructuring may mean periods of unemployment for those in traditional occupations

ENTERING THE MARKET: Delivering the Message
• 1. 2. 3. 4. 5.
The data points clearly to a number of issues that need to be considered carefully and “planned in” before launch: Heads of households are the key financial decision makers (90% of households) so targeting marketing efforts will be important 20% of agricultural and wage workers (1.5million) are illiterate and a further 20% (4 million) are functionally illiterate so oral messaging will be important Financial literacy is low generally so supportive financial advising systems will be important Media access and habits vary greatly between segments with relatively low penetration except for high income groups so media advertising will need to be segmented and targeted Scheduled castes & tribes exceed 10% in most segments and are high in some (>30% for wage workers) so NPS network access strategies will need to be sensitive to these customers access preferences

• Because of its size and complexity there are obvious • • •
dangers in attempting national implementation of the NPS from a cold start The experience of unsuccessfully marketing voluntary pensions in the past in India should be seen as salutatory also Test marketing offers an opportunity to assess products, sales & distribution approaches, financial advisory services, monitoring & evaluation tools and management information systems It is possible from the data to identify optimum test marketing locations

1. There is a significant dormant market for voluntary pensions in India that extends across economic sectors and occupational groupings and down the income distribution - Capturing this market will be primarily a matter of effective marketing

2. The ADB project demonstrates the value of

evidence led planning and the national data set created as part of the project provides a sound foundation to guide the NPS implementation plan – For PFRDA continuing in this vein by extending and supplementing the data over time will be important for long-term growth of the pension market


There are lessons also for the Indian financial sector generally in respect of other financial products - The data reveal marketing opportunities among low and lower middle income earners that to date appear not have been exploited fully by the Indian financial sector Investing in evidence led decision making to develop these markets will be important for growing banking, insurance and equity markets generally in India

Policy Proposals and Actions for
providing sustainable retirement outcomes under legislated pension and PF provisions
By Mukul Asher, Professor National University of Singapore Presented at The 7th annual Indian Pension Policy Conference September 27-28,2005, New Delhi.

Introduction EPFO
Key challenge overview Governance Structure Scheme design Non-investment related core functions. Investment policies and management

Concluding Remarks



Figure 1 provides an overview of India's social security system. It has 6 components and each component has several elements. Currently these components are not integrated in a systemic manner. Professionalism in design and management in each of the components and systemic perspective integrating them requires substantial improvement


There is thus considerable scope for improvement in the current system. This presentation focuses on reforming EPFO and occupational pension plans (superannuation)



State Governm ent

Civil Service Schemes

Local Bodies

Public Sector Enterprises (Usually DB Schemes)

India’s Social Security System


Occupational Pension Schemes (traditionally DB but significant shift to DC)

Voluntary TaxAdvantaged Schemes

Sm all sa ving s schem es

Pension products of Life Insurance Companies

National Assistance Schemes State Assistance Schem es Welfare Bodies NGOs, Family, and Community Group Insurance Schemes for Unorganized Sector

Figure 1: India’s Social Security System



Key challenge to provide quality of service and retirement income security commensurate the costs imposed on the economy. Time to ask : can India afford the EPFO in its current form?


Largest provider of retirement income in the non-government organized sector EPFO administers three schemes: Employees Provident Fund (EPF), Employees’ Pension Scheme (EPS) and Employees’ Deposit Linked Insurance (EDLI) – TABLE 1 Total contributions are 25.66% of basic salary plus DA plus certain allowances. The administrative costs are charged separately. The EPFO thus imposes large costs on the members, as its rates are higher than the international norms of between 10-20%.




Table 1 : Overview of Schemes under the EPFO Contribution [% of wages] Employer Employee Government Total Contributions Administrative charges paid by employer [unexempted sector only] Inspection Charges paid by employer [exempted sector only] EPF (1952) 3.67 12.00 nil 15.67 1.10 EPS (1995) 8.33 nil 1.16 9.49 Paid out of EPS Fund EDLI (1976) 0.50 nil nil 0.5 0.01 Total contributions 12.50 12.00 1.16 25.66





Accumulation plus interest on retirement, resignation, death. Partial withdrawals permitted for specific purposes

Monthly pension on superannuation, retirement, disability, survivor, widow(er), children. no automatic inflation indexation

Lumpsum benefit on death while in service.

Source- Asher and Vasudevan (2006) forthcoming


firms with twenty or more employees in 181 designated industries are required to be registered with the EPFO Those beginning their work careers at wages above Rs. 6500 per month are not required to join the EPFO. Companies can be exempt from participating in EPFO’s schemes if it is proven that the employees of these establishments enjoy the benefits of provident funds set up through an independent trust. Such ‘exempt’ trusts are privately managed, but are under the overall supervision of the EPFO.




As at end-March 2003, after more than 50 years of operations , EPFO covered Only 344,508 establishments, less than Malaysia with a population of only 22 million. The EPFO has not focused on enhancing its organizational capacities to cover beyond 181 industries specified( such specifications reflect a static mindset inconsistent with India's current vision of becoming a major economic power), and covering establishments employing less than 20 workers.


The provident fund scheme and the pension fund scheme in 2003 had 39.5 million and 27.5 million members respectively. The active contributors however are less than half for the EPF scheme. The active membership represents only about 5% of India's labour force. This figure alone demonstrates the extent to which EPFO has become marginal in providing retirement income security to India's labour force. Its claims for representing India's work force are therefore unwarranted.

The outcome of the EPFO policies and practices is reflected in the balances of the members shown in table 2. The balance of the member is not only low, but 16% members account for 84% of the balances. This suggests that any interest subsidy to EPFO members accrues to those in the higher wage groups. Characteristically the EPFO does not publish such data on a regular basis. It should be required to do so.

Table 2 Members’ Balances in the EPF

Balance (in Rs.) Up to 20,000 20,000 - 49,999 50,000 - 99,000 1 lakh – 1.99 lakh 2 lakh – 2.99 lakh 3 lakh – 3.99 lakh 4 lakh – 4.99 lakh 5 lakh – 9.99 lakh 10 lakh – 24.99 lakh 25 lakh – 49.99 lakh Above 50 lakh

No. of members 293.4 lakh 28.77 lakh 12.77 lakh 7.91 lakh 2.33 lakh 82,629 34,593 36,297 5973 5973 86

% of total members 84.58 8.30 3.68 2.28 0.67 0.24 0.10 0.10 0.02 0.0001 0.00001

% of total accumulatio n 16.98 21.52 16.67 20.25 10.37 5.23 2.83 4.29 1.45 0.31 0.90

Average Balance (in Rs.) 3133 40,468 70,663 1,38,414 2,40,616 3,41,959 4,42,575 6,40,229 13,16,782 25,06,620 54,48,660

Source: EPFO, Computed from Sridhar(2004)

GOVERNANCE STRUCTURE. EPFO is governed by a Board of Trustees, headed by the Union Minister of Labour Administrative and policy matters are under the control of the Central Provident Fund Commissioner, who is the Chief Executive Officer of EPFO. Thus, while the Board has a bureaucrat at its head, a political appointment has the final authority on all critical policy decisions.

The current structure of the Board is tripartite with representatives from the government, employers and employees The Central government appoints 20 members (5 from the Central government and 15 from the state governments) 10 persons each representing the employers and employees respectively appointed by the Central government Chairman (Minister of Labor) and Vice-Chairman are also appointed by the Central government. The Central Provident Fund Commissioner as exofficio member

Governance issues in existing system
The Board consists of 45 members, which is an unwieldy size All members are appointed by the Central Government There is no provision for inducting independent experts, even on a temporary or rotating basis Unlike SEBI or IRDA, there are no committees with specialized professionals to advise on policies, investments, and administration. The current EPFO board structure is ill-equipped to deal with complexities of core Provident and Pension funds tasks in both investment and non- investment areas.

Board can improve the diversity of views and hence quality of decision-making by ensuring that not all members are centrally appointed. The international trend is towards to appointing professionals as chair persons of the national provident fund rather than a politician. India should seriously consider its practice of the Minster of labour being the chairperson of EPFO. Short run time horizon of political decision making is inconsistent with the long term financial contact in administering retirement security schemes By including independent experts, the Board can gain access to new developments and ideas in the retirement financing industry

EPFO is both a service provider and a regulator of the provident and pension funds market. This dual function in one organization is contrary to good governance practices. This not only creates conflict of interest , as EPFO a service provider should not be involved in deciding who is exempt and how such funds should be run. It has no regulatory capacity and yet the administrative cost at 4.4% of the contributions, it levies on exempt funds are high.

Modernize laws and regulations. The EPFO act, 1952 and its subsequent amendments are not in conformity with the complexity of India's economy, and dynamics of its labour market. India’s overwhelming task is to create more jobs to take advantage of the demographic “ gift” phase, but EPFO’s mindset is traditional , long term employeeemployer relationships, which are becoming less of a norm.

There are many examples where current regulations and their administration are counter- productive. Because of organizational inefficiencies , there are large suspense accounts, funds i.e. where contributions have not been credited to any individuals’ accounts. The transaction processing efficiency is particularly low. EPFO has large number for withdrawal schemes for healthcare and housing purposes, which has made it almost like a bank, increasing staff load and reducing the retirement benefits which can be obtained. ( table 3)

This is exasperated by the requirements that the exempt funds must pay at least the same interest rate as the EPFO. EPFO is unable to administer efficiently when there is significant labour mobility , particularly with respect to temporary and contract workers whose role has been growing. some individuals are able to withdraw full amounts when they change jobs, defeating the purpose of retirement savings; others lose their balances due to inefficiencies of the EPFO when they change jobs. Job creation, among the highest Indian priority, is hampered when temporary workers and other accounts are not efficiently administered.

The EPS scheme is badly designed , as It defines both the benefits and the contributions . This is mathematically impossible. Given nearly Rs.20,000 crore actuarial deficit in the EPS and given that the scheme requires a 70 year time horizon of financial sustainability, it should be drastically overhauled with benefits brought in line , with assets ( Asset liability matching over a 70 year period should be practiced). The alternative would be to close the scheme and pay the accrued benefits.

Table 3 Withdrawals from the EPF


Total number of claims settled

Amount of settlement (Rs.million)

Number of claims settled on superannuation

% of superannuation claims to total claims

Average amount of settlement (Approx.)































Source- Asher and Vasudevan (2006) forthcoming

These are the four non-investment related core functions of Pension and Provident fund organizations. 1) Reliable collection of contribution/taxes, and other receipts. 2) Payment of benefits for each of the schemes in a correct way without any side-payments. In case of pre-retirement loans, ensuring their timely repayment 3)Maintaining an effective communication network, including development of accurate data and record keeping mechanisms to support collection, payment and financial activities. 4) Production of timely and policy relevant financial statements and reports. The importance of this function cannot be over emphasized As on March 31, 2003, the activities of EPFO were carried out through a network of 21regional offices, 87 sub-regional offices, and 163 district-level offices. Collectively, staff strength of EPFO amounted to 19329 persons on that date.

Key areas for improvement
• •

Accounting system – move accrual and double entry system. Providing unique Identification number to members. Connectivity among its officers across the country. Treasury management expertise.


Human resource development policies (staff must have requisite computer literacy, management must have skills for generating and implementing financial management systems ; and the organization must have mindset which accepts the goal of EPFO as a world-class service provider). EPFO’s annual report is neither widely accessible nor sufficiently informative. It should be benchmarked against such reports by countries like Malaysia. EPFO should have an interactive website that reflects India's skills in the IT sector. All circulars and forms should be online.

Table 4 provides operational indicators of EPFO , while table 5 provides administrative efficiency indicators for 2 national provident funds i.e. of Malaysia and Singapore which are regarded as reaching a high degree of administrative and compliance efficiency.

Table 4: EPFO: Operational Statistics




Establishments Covered Establishment Covered per Staff Members enrolled (in thousands) Members per staff Staff Strength Contributions Collected (Rs.Crore)

340013 17.4 26301 1344 19574

357747 18.5 27418 1419 19327

344508 17.8 39498 2043 19329

Provident Fund Exempted Unexempted Pension Fund Deposit Linked Insurance Fund

10728.44 4328.89 6399.55 4222.61 139.36

11188.26 4278.13 6910.13 4449.04 153.47

11388.14 3859.37 7528.77 4787.84 158.62

Source- Asher and Vasudevan (2006) forthcoming

Table 5 indicators of Administrative Efficiency in Malaysia and Singapore, 2004 Variable Central Provident Fund (CPF), Singapore Employees Provident Fund (EPF), Malaysia

Operating cost as % of income



Operating cost as % of Funds Under Management (FUM)



Operating cost as % of contributions



Number of employers registered per employee Number of members registered per employee Number of active contributors per employee







Source- Asher and Vasudevan (2006) forthcoming

Investment policies and management On March 31, 2003, the EPFO held investments worth Rs.1,51,278 crore under its three schemes, equivalent to 6% of India’s Gross Domestic Product. Almost two-thirds of this corpus (64%) was directly under EPFO’s management, and the remaining was managed by private exempt provident funds. Investment management is outsourced by the EPFO to the State Bank of India Funds available with the EPFO are invested in accordance with guidelines prescribed by the Government of India. Exempt establishments are also required to follow the prescribed investment pattern

There are two sets of guidelines , one by ministry of labour 2003 and the other by ministry of finance, 2005. The IRDA also has investment guidelines for the pension corpus of the life insurance companies that it regulates. The IRDA guidelines are consistent with modern financial principles and practices. Ministry of finance has allowed a small percentage to be invested in equities through mutual funds, while ministry of labour guidelines permit primarily public sector debt, with no equities. It is therefore the list in tune with India’ sophistication of financial and capital markets.

Moreover the ministry of labour and EPFO do not even permit the exempt funds to follow internationally accepted investment policies , permitting asset diversification, but with strong regulation. (table 6) This hampers the vision of India becoming an important regional financial center and using its relatively more developed financial and capital markets as a competitive tool against other countries such as China.

Table 6 Investment Guidelines for Provident Funds ,
Investments in
Central Govt. Securities State Government securities and negotiable instruments guaranteed by the Government Bonds of Public financial institutions and PSUs In any category as may be decided by the trustees Private sector bonds/securities

% of total
25 15

40 20 10% out of the 20% above

Actual investment by EPFO: At end-March 2003, 80% of the EPFO’s Provident Fund corpus was invested in Special Deposit Schemes of the government and the remaining locked into central and state government securities and bonds of public financial institutions and PSUs Interest rate paid by the EPFO is administered, and has no link with return earned on its investments, or market rates Figure 2 shows the gap between yield on government securities and interest rate paid by the EPFO. The shortfall is funded from reserves or subsidized by the government

Fig 2 Interest rates: EPF Payouts Vs. Earned
14 13 12 11 10 9 8 7 6 5 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

EPF interest rate G-sec yield medium term G-sec yield long term

Source- Asher and Vasudevan (2006) forthcoming

Investment Strategies Investment Strategy is Passive: Investments are made on a buy and hold basis Re-investment risk: EPFO liabilities are very long-term; its assets are relatively short-term. This mismatch is managed by repeatedly rolling over investment; thus exposing the fund to the risk that re-invested proceeds might earn a lower interest rate. As Fig 1 shows, interest rates have fallen continuously in the last decade, exposing EPFO to a high degree of re-investment risk No Transparency: Investments are valued at cost. Since there is no mark-to-market valuation, opportunity losses and gains cannot be measured by contributors

Lost opportunities of booking capital gains
By imposing total restrictions on sales, EPFO has lost the opportunity to make capital gains on its portfolio of government bonds in a falling interest rate scenario (rates on government borrowing have fallen by over 500 basis points in the last few years)

Loss of profits from equity premium
By holding an all-debt portfolio, EPFO has lost the benefit of higher returns from equity Using a simple numerical simulation, it can be shown that terminal wealth in a portfolio consisting of 80% debt and 20% equity, will be twice the wealth accumulated under an allgovernment debt portfolio (Table 7); even if no trading is permitted

Table 7: Terminal wealth for annual PF contribution of Rs.15.67 (Rs.12 from employee, Rs.3.67 from employer)

Real rate of return scenarios 100% Government debt 80% Government debt 20% Equity

2% debt, 9% equity 964.93 1338.07

4% debt, 11% equity 1278.64 1824.48

30 year working life; real wage growth of 3% per year; equity premium of 7% [following Shah(2003)] Note: Table 7 refers to wealth accumulated in a contributor’s account, assuming contribution rates and interest rates. It does NOT refer to actual amounts paid at retirement, because that is computed on the basis of a higher administered nominal rate

Exempt Funds potentially more efficient ( with some exceptions) In 2002-03, over 10% of exempt provident funds paid a higher interest rate than the minimum administered rate prescribed by the EPFO Simply assuming that these funds consistently pay 0.5% over the funds directly managed by EPFO, terminal wealth would increase substantially (Table 8)

Table 8: Terminal wealth for annual PF contribution of Rs.15.67 (Rs.12 from employee, Rs.3.67 from employer)

Real rate of return scenarios Unexempt Fund Exempt Fund Percentage Difference in wealth

2.0% / 2.5% 964.93 1033.07 7.1

4.0% / 4.5% 1278.64 1376.67 7.7

30 year working life; real wage growth of 3% per year Note: Table 8 refers to wealth accumulated in a contributor’s account, assuming contribution rates and interest rates. It does NOT refer to actual amounts paid at retirement, because that is computed on the basis of a higher administered nominal rate

The EPFO has almost 20,000 staff, but no treasury department, or investment professionals. Who will be held accountable for its fund mismanagement? Poor disclosure and valuation at cost implies that inefficiencies are not widely known and taken note of. As custodian of savings of the public, is it not EPFO’s responsibility to make its operations more transparent? Is EPFO not accountable to its contributors?

Concluding Remarks
A Mindset change is needed with appropriate leadership to transform EPFO from an employer focused to employee focused organization. The EPFO should aim to become a world class service provider for its members and acquire investment management capabilities. Its time to begin taking advantage of India's demographic “ gift” phase, reflected in increasing share of working age population in total population till 2045.

Towards estimating India’s Implicit Pension Debt
Gautam Bhardwaj S.A. Dave

26th September 2005

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Implicit Pension Debt (IPD) Methodology and assumptions IPD for central government employees IPD for state government employees The funding gap in EPS 95 Summary






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Implicit Pension Debt

What is Implicit Pension Debt (IPD)? Why should we measure IPD?

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Components of India’s IPD

Central government employees, Defence employees, State government employees, Central government pensioners and family pensioners, Defence pensioners and family pensioners, State government pensioners and family pensioners, The funding gap in EPS.

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Scope of our IPD estimates

At present, no IPD estimates for the Indian State exist. We have computed the IPD for only two of these seven components – central and state government employees. And we have taken the last actuarial valuation as the IPD of EPS 95. Our estimates are only a part of the overall IPD of the India State.

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Demographic characterists of government employees. All computations at 2004 Rupees. Actuarial aspects embedded in LIC’s annuity prices. Future pension payments are outsourced. All existing employees will continue till age 60. All government employees come under NPS on 01 January 2005. Future evolution of wages:
Wage-experience profile of workers, Future pay commissions.

Discounting future purchase of annuities.

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Our Conservative Assumptions

Fresh flows of addition to the IPD freeze on 01 January 2005. Modest impact of future Pay Commissions at less than 2% per annum on an average. Use of nominal LIC annuity prices. LIC annuity prices offer only 25% survivor pension. Annuity prices stay constant over time.

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IPD: Pension for central (civil) employees

Year of retirement 2006 2011 2016 2021 2026 2031 2036 2041

Number retiring 503,992 727,971 1,108,022 951,621 850,937 528,436 465,110 149,435

2004 wage (Rs.) 84,000 80,599 84,000 84,000 72,000 74,563 65,000 36,000

Predicted pension (Rs.) 43,697 54,659 62,879 82,080 77,554 104,739 100,785 72,830

Annuity price (Rs.) 625,133 781,955 899,552 1,174,244 1,109,500 1,498,418 1,441,844 1,041,924

Total cost - FV (Rs. crore) 31,506 56,924 99,672 111,743 94,411 79,181 67,061 15,570

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IPD: Gratuity for central (civil) employees

Year of retirement 2006 2011 2016 2021 2026 2031 2036 2041

Number retiring 503,992 727,971 1,108,022 951,621 850,937 528,436 465,110 149,435

2004 wage (Rs.) 84,000 80,599 84,000 84,000 72,000 74,563 65,000 36,000

Predicted Gratuity (Rs.) 120,166 150,311 172,916 225,350 213,274 288,035 277,158 200,284

Total cost - FV (Rs.crore) 6,056 10,942 19,159 21,445 18,148 15,220 12,890 2,993

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NPV of Central Government IPD

IPD estimates are based on 5,285,523 workers. The NPV of IPD for central (civil) employees on account of pension is Rs.388,629 crore. The NPV of IPD for central (civil) employees on account of Gratuity is Rs.74,704 crore.

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IPD: State government employees

Year of retirement 2006 2011 2016 2021 2026 2031 2036 2041

Number retiring 1,340,895 2,643,722 3,181,843 3,265,364 3,356,840 2,372,499 1,570,199 706,949

2004 wage (Rs.) 84,000 84,000 78,000 72,907 72,000 62,000 56,029 41,244

Predicted pension (Rs.) 43,697 56,965 58,387 71,123 77,554 87,093 86,875 83,439

Annuity price (Rs.) 625,133 814,950 835,299 1,017,503 1,109,501 1,245,961 1,242,847 1,193,693

Total cost - FV (Rs.crore) 83,824 215,450 265,779 332,252 372,442 295,604 195,152 84,388

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IPD: Gratuity for State Government employees

Year of retirement 2006 2011 2016 2021 2026 2031 2036 2041

Number retiring 1,340,895 2,643,723 3,181,844 3,265,365 3,356,840 2,372,499 1,570,200 706,950

2004 wage (Rs.) 84,000 84,000 78,000 72,906 72,000 62,000 56,029 41,244

Predicted Gratuity (Rs.) 120,166 156,654 160,565 195,589 213,274 239,505 238,906 229,458

Total cost - FV (Rs.crore) 16,113 41,415 51,089 63,867 71,593 56,822 37,513 16,221

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NPV of State Government IPD

IPD estimates are based on 18,438,515 workers. The NPV of IPD for state government employees on account of pension is Rs.1,273,182 crore. The NPV of IPD for state government employees on account of Gratuity is Rs.244,738 crore.

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Trends in EPS actuarial valuations

Valuation Dates 16.11.1996 31.03.1998 31.03.1999 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004

Liability in Rs.Crore 55,566 79,472 99,246 126,614 98,285 139,691 159,005 176,288

Future contributions in Rs.Crore 44,380 63,464 77,736 98,920 65,119 83,513 90,671 52,745

Future balance in Rs.Crore 12,875 17,247 22,242 27,764 33,123 39,042 49,043 101,522

Surplus in Rs.Crore 1,689 1,239 732 70 (-) 43 (-) 17,136 (-) 19,291 (-) 22,021

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Summary Estimates

Component 1. Central civil employees 2. Central civil pensioners 3. Central defence employees 4. Central defence pensioners 5. State civil employees 6. State civil pensioners 7. Funding gap in EPS 95 Total

Implicit Pension Debt Rs.crore As % of GDP 463,464 14.92

1,517,920 22,021

48.88 0.71

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We have obtained IPD estimates for only three of the seven components. The NPV of these adds up to an IPD of Rs.2,003,405 crore. This is 64.51% of GDP (2004-05). The explicit internal public debt of GOI is 84.86% of GDP (2004-05).

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Thank you

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India’s Financial Markets and New Pension System (NPS)

Date: 27th September 2005

(U.K Sinha) Joint Secretary (CM&PR)


Framework of the Presentation
Backdrop Proposed Institutional architecture under NPS Products under NPS Issues under NPS Dealing with Issues Capital Market and NPS- is the relation symbiotic? International experience Summary



Main Concerns about New Pension System
Government abdicating from responsibility of providing pension Private management Vs public management Vagaries of capital markets- investment in Government Bonds No guaranteed returns Foreigner’s will control pension sector ( walk away with pension wealth ?) Premature withdrawals not allowed

Pension Coverage
Workers covered by EPFO and other PFs (10%)

State/Central Government Employees (2.8%)

Civil Servants Large Private Firms Informal Sector

Excluded workers (87.2%)


Government Pension Payments
40000 State 37500 s 35000 32500 30000 27500 GOI 25000 22500 20000 17500 15000 12500 10000 7500 5000 2500 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -91 -92 -93 -94 -95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 (RE) (BE)

Pension Payments (Rs. crores)

Financial Year
Source: Department of Expenditure, Ministry of Finance; Reserve Bank of India


Government’s Management of pooled funds
EPFpooled management Sustainability of returns Choice to individuals Portability Cost of management Management issues EPSAssets Liability mismatch

Relationship between pensions and capital markets
Synergy between capital market and pension sector development. Is the relationship symbiotic? Global experience- no particular sequencing of capital market reforms and pension reforms. Private pension funds neither necessary nor sufficient for capital market development- but after reaching critical mass could impact modernization and development


India’s capital markets- where are we?
Parameters No. of listed companies No. of Brokers Trading Terminals (cities) No. of MFs No. of FIIs 1993-94 2500 5290 24 ( 1997) 12 18 2003-04/04-05 5644 9368 464 37 787

India’s capital markets- where are we?
Market capitalization Net FII Investment MF Resource Mob. Assets under custodian

Rs.1.9 lakh cr Rs. 5,126 cr. Rs. 11,243 cr. Rs. 2.7 lakh cr.
( 2001-02) 2001-

Rs. 43 lakh cr.
( Sep 2005)

Rs. 45,765 cr. Rs. 47,684 cr. Rs. 4.9 lakh cr

----------------------------------------------------------------------------------------------------2000-01 2003-04 Total derivative contracts 90580 5.7 cr Total derivative contracts Rs. 2365 cr Rs. 21 lakh cr. ----------------------------------------------------------------------------------------------------10

New Pension System- Status
New Pension System implemented from 01 January 2004. More than 1,00,000 new central government employees already under NPS. All central autonomous bodies having GOI type pension covered under NPS 12 State Governments notified the new defined contribution scheme. More likely to follow. CGA, CPAO and other payment arms are implementing the new administrative procedures. A return of 8% given to NPS in the interim- no external fund management

Full NPS Architecture
Central Government State Governments

Excluded Trusts


Small Private Firms





Banks Post Offices MFIs


Annuity Provider 1 Annuity Provider 2 Annuity Provider 3



NPS- Institutions
Central Record Keeping Agency- CRA Point of Presence- POPs Retirement Advisers Pension Fund Managers- PFs Independent Regulator

New Central Government employees New State Government employees Superannuation Funds Exempt Funds Non-mandatory EPFO participants Tax-paying unorganised workers Young existing Central Government employees Young existing State Government employees Armed Forces Non-tax paying unorganised workers

Schemes- proposed Investment options
Options A B C D Govt. Bonds at least 60% at least 40% at least 25% 100% Corp Bonds at least 30% at least 40% at least 25% 0 Equity upto 10% upto 20% upto 50% 0

Investment regimes
Mutual Funds
Rated debt: not more than 15% Unrated: not more than 25%

IRDA (pension)
G-sec: at least 20% Approved securities including g-sec>40%

Central G-sec: 25% State G-sec:15% PFI+pvt. bonds:25% Equity: 5% In any of the above: 30%

Listed equity: not more than 10% Other approved invts<60% in one company Unlisted equity: not more than 5% Overseas investment in equity & debt permitted with an industry ceiling=USD 1bn. --------------------------------------------------------------------------------

NPSG-sec upto 100%, Coporate Bonds upto 75%, Equity upto 50%

Dealing with Challenges
Investment protection guarantee
– 100% g-sec option could provide guaranteed principal and return if locked in till maturity – Use of derivative products- buying an option could protect the principal – Unitized With-profits funds- returns are smoothened e.g. hold back some return in good years to compensate it in bad years. – HK- at least one option which preserves capital. This is also the default option. Most investments in money market and short term deposits. – Distribution and advice to be separated – Addressing Conflict of interests

Role for investment advisers/agents in NPS


Pension Reforms and Capital Market International Experience


International Experience
Chile - in 1984 no bond/stock market, but in 1997 capitalization of bond market was USD 80 billion and USD 7 billion respectively At the end of 1998, about 63 % of G-secs, 54% of mortgage bills and banking notes, 16% of bank deposits and 10% of stocks were held by private pension funds which are part of the new DC pension system.

Recent Global Reforms- Learning Points
Mature markets UK US Germany Japan Canada Italy *P: Prudent man Emerging markets Argentina Chile Mexico Hungary Poland Portfolio limits for Pension Funds (%) Equities Foreign assets P* P P P Max 30 Max 20 Max 30 Max 30 Max 20 P P

49 39 0 50 50

10 30 10 (only own sovereign bonds) 30 5

Some Numbers Real Returns from market (in %)
Regions World (1802-2001) India (1979-2005) Government Bonds 3.5 Stocks 6.9


19 (nominal)

Availability of a vibrant capital market helps development of pension sector The principal objective of pension funds should be to provide retirement benefits by maximizing net returns Pension funds should:
– – – – stimulate financial innovation; exert pressure for greater market integrity; strengthen corporate governance; and encourage robust financial regulation




Private Pension Plans: Policy Perspectives

Dr. Rajiv Kumar Chief Economist, CII

At 7th Annual IIEF Pension Policy Conclave, 2005

Financial Sector: Some numbers

• TOTAL HH SAVINGS 2004-5: Rs. 6,71,692 Cr.
(Rs. 6.72 Trillion)

(Rs. 3.25 Trillion)

• TOTAL DEPOSITS: Rs. 1,79,388 Cr.
(Rs. 1.79 Trillion)

• TOTAL BANK DEPOSITS:Rs. 1,69,540 Cr.
(Rs. 1.69 Trillion)

40 1991-92 56 1992-93 50 1993-94 60 1994-95 61 1995-96 49 1996-97 61 55 1997-98 1998-99 55 1999-00 2000-01 2001-02 50 2002-03 44 2003-04 47 48 43 46 49 52 55 58 61 64

Financial Savings as % of Household Savings

S h a r e (% )

100 90 80 70 60 50 40 30 20 10 0 1991 1992
5 6 .0 8 4 3 .9 2 5 0 .1 3 4 0 .1 6 3 9 .4 4 5 1 .0 9 3 9 .2 7 5 4 .6 8 5 5 .1 9 5 0 .8 8 4 5 .3 2 4 4 .8 1 4 9 .1 2 4 9 .8 7 5 9 .8 4 6 0 .5 6 4 8 .9 1 6 0 .7 3 4 5 .1 7 5 4 .8 3

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0

Fin saving % of total hh saving HH GDS as % of GDP
4 7 .9 3 4 9 .5 0 4 4 .2 7 4 6 .7 9

5 2 .0 7 5 0 .5 0 5 5 .7 3 5 3 .2 1

Gross Household Savings







non-fin saving % of total hh saving Linear (HH GDS as % of GDP)

% of GDP

Distribution of Financial Household Savings

(Rs. Cr) Bank Deposits Shares and Debentures Govt. securities Insurance Provident and pension funds

2001-02 2002-03 2003-04 114232 139701 179388 7777 16840 45546 46597 5504 14574 40205 47932 5699 16732 48834 50439

Market Capitalization

(Rs. Trillion) BSE NSE Nifty Junior Govt Domestic Debt Mutual Funds

2001-02 2002-03 2003-04 2.77 6.35 7.35 3.53 6.34 9.03 0.35 1.32 1.65 9.13 0.08 10.21 0.04 11.42 0.47

Market Capitalization
2.0 1.8 1.5 1.3 1.23


1.0 0.8 0.5 0.3 0.0 2001-02 2002-03 2003-04 0.43 0.35

HH Financial savings as % of Total Capitalisation

Government Savings Schemes

Rs. Crores 2001-02 2002-03 2003-04 Post office Deposits 81753 105601 135970 Provident and Pension Funds 46597 47932 50439

Household Savings: Share of Financial Savings (%)
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net deposit 22.53 23.37 30.44 34.67 34.97 32.99 42.40 38.33 30.60 27.86 33.49 29.23 27.39 29.86 Shares and debentures 16.94 25.58 21.15 15.59 14.40 8.61 7.35 3.45 3.88 8.81 4.71 3.06 2.16 1.81 Net claims Life Provident on insurance and pension government funds funds 14.71 10.75 22.47 7.08 10.66 20.16 5.30 10.35 22.72 6.58 9.71 19.34 10.59 9.12 17.74 8.84 12.79 21.14 8.17 10.99 21.45 14.77 12.77 21.98 15.17 12.52 25.74 13.54 13.46 26.20 17.43 15.08 22.08 20.12 18.15 18.35 24.51 15.92 18.84 23.34 15.50 16.05

Policy Objectives 1. Increase share of financial savings in total household savings. 2. Encourage long term savings in pensions and life insurance instruments 3. Rationalize incentives so as to create a level playing field for public and private savings schemes.

Policy Objectives (contd.)

4. Reduce multiplicity of Tax regimes that exists at present. 5. Help simplify direct tax regime

Policy Response • Has there been an attempt to look at household savings behaviour and formulate policy response? • Kelkar Task Force principal if not exclusive objective understandably appears to have been simplification of tax structure. • In that context suggested the EET structure for all savings schemes

Policy Response (contd.) • EET Recommendation: It assumes life insurance premium solely as a savings option. • Does not distinguish the risk component of the premium and this can not and should not be taxed. • Is it feasible to isolate the risk and savings components in a term (non pay back) policy?

Policy Response (contd.)

• Policy for encouraging long term savings including Pension savings. • Experience is mixed. Not all countries exempts contributions. Is the EET scheme a suitable one? • How do we tackle moral hazard and increase confidence?

Policy Response (contd.) • Important also to discuss policy measures for:
encouraging market expansion behaviour by private players. Increasing confidence of households in financial markets Preventing pre-emption of savings by government.