Pension Sector Reforms
November 17, 2001, New Delhi

Welcome Address by Shri A S Kasliwal, Past President, FICCI

Mr N Rangachary, Chairman, IRDA
Mr Ajai Singh, P F Commissioner,
Mr H O Sonig, Member, IRDA,
Mr Sanjay Sachdev, MD & CEO, IDBI Principal AMC
Distinguished Panelists & Friends,

It is with immense pleasure that I welcome you all to this Seminar on 'Pension Reforms in India'. I am specially grateful to Shri N Rangachary, Chairman, Insurance Regulatory Development Authority for kindly agreeing to spare his valuable time to be with us today to share his perceptions on this important topic.

The Pension Fund system that exists in India suffers from the twin disabilities of not being able to provide an adequate security net for the old age population and at the same time exerting a huge pressure on government coffers. According to the 1991 census Reports, India has an estimated 314 million workers of which a mere 11% are covered by the formal pension system. The crumbling down of the joint family system and the increase in life expectancy have aggravated the extent of insecurity arising from inadequate income at an old age. On the other hand the existing pension system for a small amount of working population based on defined benefit formula adds on heavily to the state's fiscal deficit. In fact it is estimated that if the present system were to continue then in a decade's time the pension expenditure of the Government would exceed over 5% of the GDP. While, keeping in view the urgency of building a wider security net for the working population while keeping a check on the fiscal deficit, we need the evolution of a strong and vibrant pensions market.

Hon’ble Finance Minister set the ball rolling by entrusting the job of defining the road map for pension sector reforms to the IRDA. As expected, the IRDA under Mr Rangachary’s capable leadership has delivered within the stipulated time frame. Earlier, the OASIS committee too had done considerable job in this area. The ball is now in government’s court to take an early action.

FICCI as you all know has been keenly involved in this area. A task force was also set up under the chairmanship of Mr Sanjay Sachdev and the recommendations were submitted to IRDA last October for their consideration. To reiterate some of our recommendations, I would briefly state some of them:

There is definitely a need to have a sound framework to regulate pensions business, which would give pension buyers a fair degree of confidence in Industry with respect to risk management, mis-selling & prevention of fraud. The need for a pension regulator cannot be overemphasised.

This could be a separate Indian Pensions Authority (IPA) under the aegis of IRDA regulating the Pensions Business.

To reinforce consumer confidence, the retirement accumulation business should be separated from the existing business of the promoter, and the reporting & regulatory issues relating to the retirement & accumulation schemes should be governed by the IPA.

FICCI taskforce felt that the pensions model in India based on the world bank model could reflect the following features such as:

• The government should set up a separate corpus out of its tax funds to provide social security net to those below the poverty line or what can be called modest means- tested tax financed pension, as Pillar I;
  
• Defined contribution fully funded individual retirement accounts with fund management entrusted to private fund managers as recommended by the OASIS Committee as Pillar II; and
  
• Building of pensions through occupational and personal pensions initiatives through the liberalised life insurance industry as Pillar III.
  
• It is suggested that for employers with 5 or more employees and who do not provide any retirement benefit in the form of provident fund or pension it may be made mandatory that they provide their employees an access to the OASIS pension by facilitating deduction of contribution from the salary and its remittance. This is suggested on the basis of the model adopted in Hongkong from December 1, 2000. Similar provision exists in the UK in respect of Stakeholder Pension. The access will be limited to the employers facilitating the deduction from the salary and remitting it as contribution.
  

The pension fund industry once developed would lead to a higher inflow of returns. The privately managed funds if invested prudently over a long period would benefit both the fund starved industry and the employees. In fact most countries including Latin America were able to generate incremental savings of US $8-10 billion per annum which gave a large fillip to the investment position of those countries. In India too the pension fund industry can help improve returns tremendously.
The development of pension funds will also give an access to long term funds. This will really plug the gaping hole in India’s fine market where access to India’s long term finance is an issue.

It is important to note that the final success of a Pensions also largely depends upon the overall reform of the capital market, insurance industry and the tax regime. Macro issues like a further deepening of the financial markets, increased liquidity in the financial system and a more efficient redressal system (judicial system) will play a very crucial role in the performance of the Pension Fund industry. Another important factor that will contribute to the success of the Pension Reforms, is the ability of the government and the regulator to take all sections of the community into confidence including the employers, employees and their representative Trade Unions, the NGOs and the media.

The need of the hour is to chalk out the path of growth for which purpose we have all assembled here today. I am sure that this seminar will be successful in earmarking the future strategies that will ensure a fast and sustainable development of the Pension Industry. With these words may I request, Mr Sanjay Sachdev, to make the theme presentation.

Thank you