India Pension Systems

Some Issues

Historical Framework

• Schemes are employer based– Government pays DB Pensions

• 11 million members (Union & State)

– Most Private Companies & PSE’s part of EPF• 21.5 million members

– Some Private Sector have own Provident Fund• 4.6 million members in exempt schemes

• Labour force of 324 million

• Poorest 50% of population have -ve savings

• Low life expectancies rapidly extending

Form al pension-system coverage: India com paredw ith international pattern

y = -9E-10x 2 + 6E-05xR2 = 0.9096

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5000 10000 15000 20000 25000 30000

Inc om e pe r c a pita 1 9 9 5 PPP$

Co

ntr

ibu

tors

/Wo

rkin

g a

ge

I ndia

N ote: Sam ple excludes transition socialist econom ies.Source: Palacios and Pallares (1999).

Fiscal Constraints

• Direct cost of Civil Servant Schemes

• Indirect cost of interest cost of funded schemes - 90% invested in government debt

• Only 11m tax payers - forced investment in GoI debt a form of tax

• Relics of state involvement in financial sector interest rates sticky downwards

Labour Market

• 20 Year vesting for Government Pensions

• GoI Pensions represent a significant portion of total compensation

• Private Employers frequently extend vesting beyond legal minimum

• No transferability between Provident Funds

Challenges

• High transaction costs of dealing with government schemes & poor record keeping

• Low cash cost of operating government schemes does not equate to good value

• Lack of confidence in employer managed schemes & delinquency in employer contributions to government plans.

• Regulatory vacuum

Cum ulative growth in Em ployees Provident Fund, equities, and m ixed portfolioversus incom e per capita, 1979–96

0

100

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400

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1000

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Index =100 in1979

Equities

EPF

1/3 stocks

Incom e per capita

Concluding Comments

• Changes to Mandatory Schemes will not affect the vast majority of the elderly

• Micro-insurance at the community level may be more effective to extend coverage

• India is in some ways ahead of the curve. Funded Defined Contribution Schemes are the trend of the future

• Financial market repression & poor governance weaken funded schemes