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5th Annual IIEF Pension Sector Summit, 2003
03 - 04 December 2003, Hotel Intercontinental, New Delhi, India
Cosponsored by:
India is ageing. Traditional social structures, which cared for the elderly, are steadily breaking down. There is a need for new formal mechanisms for old age income security. In the last few years, a number of important developments and studies have led the Government of India to reexamine the various public programs meant to ensure old age income security for its workforce and consider reform strategies which include an increased role for privately managed, defined contribution schemes.
While presenting the Union Budget for 2003-04, the Finance Minister announced the Government's intent of introducing a new, defined contribution pension system with individual retirement accounts, product choices, professional funds management, and portability through centralized recordkeeping and administration. Participation in this system would be mandatory for all new recruits into the central government (excluding armed forces). The remaining workforce, including informal sector workers who are presently excluded from any formal pension provision, would be able to participate in this system on a voluntary basis. This new system, as well as a decision to set up a new Pension Fund Regulatory and Development Authority (PFRDA) to supervise and regulate the functioning of this new pension system was formally approved by the Union Cabinet on 23 August 2003.
For decades, pension liabilities in the form of unfunded promises made by governments to the early generations have been accumulating. The new system would enable the central government to gradually transit to a fully funded pension scheme over the next 35 years. It would also, for the first time, provide a vehicle for informal sector workers to save for their retirement during their working lives. This will in turn contribute to greater income security in old age for our workforce as India enters its demographic transition. By reducing fiscal pressures caused by unfunded or inadequately funded pensions, and by channeling long-term savings effectively, the new pension system will benefit a much wider population in the decades to come.
Today, we are witnessing several important initiatives on pension system review, design and implementation:
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The Department of Economic Affairs under the Ministry of Finance has been charged with the responsibility of implementing this new pension system through the setting up of the PFRDA. As this new pension system is translated from ideas to implementation, the government and the PFRDA will be faced with numerous important questions and policy choices. What should be the entry and selection criteria for pension fund managers? Should the number of pension fund managers be limited? How can this be achieved? How will the funds, instructions and information flow between the various participants? What capacity is needed for seamless inter-linkages between the POPs, fund managers and the CRA? What should be the fees and charges in this system and how these be decided? Should the fees be asset-based, transaction-based or a combination of the two? What are the regulatory overlaps and areas for coordination between PFRDA and other financial regulators? What should be the tax treatment for pension contributions and benefits? What should it be for the entities in this system? How will we achieve coverage from the informal sector workforce in a voluntary system with low levels of financial literacy? Should the system provide guarantees? And if so, what should be their structure and how will these be funded? What malpractices and frauds are likely in the new pension system and what would be the procedure for whistle-blowing, filing of complaints and grievance redressal? What are the optimum timeframes for implementing the various components in the system?
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In parallel, most State Governments are becoming highly conscious about questions of the design and fiscal sustainability of retirement benefits for their own employees and pensioners. However, unless the Centre formally announces its decisions concerning pension reforms for its civil servants, a majority of the states are unlikely to formally announce a strategy for their own civil servants. This should however not preclude the states to undertake a scientific assessment of their own pension debt and to make preparations so that their pension reforms can be implemented quickly once the centre unveils this new system. Importantly, some states (e.g. Tamil Nadu and Karnataka) have already begun reviewing their pension provisions and are considering various policy alternatives for systemic and/or parametric changes in these provisions. In this direction, the Reserve Bank of India recently constituted an expert committee to gather information and data on state government pensions structures and liabilities - the draft report of this committee has now been received by the RBI.
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The Ministry of Labour, through the EPFO , runs one of the largest contributory provident fund and pension systems in the world with mandatory participation by around 30 million workers employed in the formal, private sector. The EPFO has recently announced several significant improvements and reform initiatives which include changes in the EPF Act of 1952 as well as reengineering of EPFO's business processes, centralized recordkeeping and administration, improved services for their members and faster, easier access to their retirement savings. However, in the face of falling interest rates in the economy, the EPFO will also need to review its investment regulations in order to fulfill its role and responsibility of maximizing benefits under the Employees' Provident Fund (EPF) scheme as well as to meet its obligations of providing a 50% replacement rate to its members under the (defined benefit) Employees' Pension Scheme (EPS) without compromising the safety of the retirement savings of their members. This is especially important for firms which have been exempted by the EPFO and are mandated to provide the same returns as the EPFO.
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Over the last few months, a majority of life insurance firms have launched unit-linked pension products which bundle annuities and life insurance. These firms have made significant progress in improving generic public awareness on retirement planning and pensions and are aggressively marketing their products.
In this environment, Invest India Economic Foundation (IIEF) , which served as the convener of the OASIS Project and the consultant to the Ministry of Social Justice & Empowerment, Government of India on pension reforms, is hosting its annual pension conference as a 2-day policy and business summit at New Delhi.
A key objective of this year's conference will be to provide a platform to policy-makers and regulators to discuss the policy direction, implementation ideas and operations of the new pension system with domestic and overseas experts, and market participants, as well as to obtain useful information, analysis and feedback from a wide spectrum of participants and potential users of this system. This forum will also provide participants an insight to the functioning of existing provisions for old age income security in India as well as current reform initiatives and a roadmap for their future development. It will provide the pension administrators and policy-makers associated with pension provisions with a greater clarity on the core principles of pension system design, reform and implementation.
IIEF hopes that this discussion will be a useful input for efficient and speedy implementation of the new pension system and will enable participants to share and benefit from each others experiences and plans for improving post-retirement consumption for India's workforce.
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