ASSOCHAM-IIEF Pension Fund Management Conference 2003
Policy Imperatives and Investment Strategies for maximising Retirement Benefits for India's Retired workforce 03 September, Imperial Hotel, New Delhi, India

While presenting the Union Budget for 2003-04, the Finance Minister announced the Government's intent to introduce a new defined contribution pension system with individual retirement accounts, product choices, professional funds management, as well as portability through centralised recordkeeping and administration. On August 23, 2003, the Government of India approved this new pension scheme. Participation in this scheme would be mandatory for all new entrants to central government service (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. The Government has also decided to set up a new pension regulator named the Pension Fund Regulatory and Development Authority (PFRDA) to supervise the functioning of this pension system and to regulate the professional management of retirement savings.

Competition between private fund managers has been widely viewed as a highly desirable feature of the pension sector across the world. Standard, simple and regular disclosure of performance, fees and costs, in an environment where fund managers compete to attract pension assets and consumers are free to switch between products and asset managers offers two key benefits to members: it provides a powerful motivation for efficient management of retirement savings and lowers asset management costs to members. Prudently liberalized investment guidelines and the direction of retirement savings into equity markets, which have traditionally given the highest return over multiple decade horizons, would further improve retirement benefits for participants. As the institutional capacity, processes and supervision infrastructure in India's financial markets compares favorably with the markets in some of the most developed economies across the world, our markets can be efficiently harnessed to improve the retirement benefits of our workers.

On the other hand, guaranteeing benefits 30 to 40 years into the future, especially in the face of interest rate volatility and fluctuating inflation rates requires complex actuarial calculations without any guarantees that these predictions would hold across multiple decades. The experience with defined benefit provisions across the world as well as in India had prompted the OASIS Committee to recommend that the benefits under the new pension system would not be guaranteed and would instead depend primarily on total contributions and the accumulated investment earnings on them - thereby imposing zero liabilities on future governments.

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 25 million workers employed in the formal, private sector. The EPFO has recently announced several important reform initiatives which include reengineering of their business processes, centralised recordkeeping and administration, improved services for their members and faster, easier access to their retirement savings. However, with a progressive lowering of interest rates in the economy over the last few years, the EPFO has faced an increasing challenge to meet its obligations under EPS and to maximize the retirement savings of the formal sector workforce through the EPF. With this objective, there is lot of rationale for the EPFO to introduce competitive fund management strategies and also prudently review and liberalize its investment guidelines without compromising the safety of the retirement benefits of their members. This is especially important for firms that have been exempted by the EPFO and are allowed to manage the PF contributions of their employees. These exempted funds are mandated to provide returns which are identical to those announced by the EPFO every year using the same investment guidelines as are used by the EPFO.

In this environment, ASSOCHAM and IIEF (the convener and consultant of Project OASIS) are hosting a one-day conference at New Delhi to evaluate the policy imperatives and impediments, as well as prudent investment strategies that can be adopted to maximize retirement benefits for India's workforce. A key objective of this conference is to provide useful information and analysis on strategies for long-term investment to policymakers and other stakeholders as the pension reforms process graduates to implementation. ASSOCHAM and IIEF hope that this discussion will be an important input in the design and implementation of pension reforms, which will in turn contribute to greater income security in old age as India enters its demographic transition. Moreover, it is hoped that 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.