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H.O. SONIG

MEMBER, IRDAOECD/INPRS/KOREA CONFERENCE ON

PRIVATE PENSIONS IN ASIAOCTOBER 24-25 SEOUL (KOREA)

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• It was in 1889 when Bismarck created thefirst contributory old age State PensionScheme that the concept of Pensionsystem was born.

• Most developing countries introduced itthrough PAYG pension plans which areusually not funded.

• England introduced it in 1908, followedby France in 1910 and Sweden in 1913.

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• With globalization, privatization andliberalization, the employment systems arebecoming informal.

• The organized sector is shrinking.

• There is a trend of outsourcing most of theservices.

• Consequently the number of employees arebeing gradually reduced and theestablishments getting smaller.

• Time has come to extend pension benefitsto all such establishments.

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• Apart from Individual & Group PensionPlans, schemes like Employees’ ProvidentFund, Employees State Insurance, SocialInsurance, are some of the parts of pensionsystem in India.

• Its benefits are determined by what theworkers have contributed and also by a pre-determined formula like - “defined benefits”system in the organised sector.

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• However, the problems in extending thepension system in the unorganized sectorare many.

• Earning pattern is irregular.

• Seasonal nature of work like that ofagricultural workers, is another problem.

• Absence of employee-employerrelationship becomes an impediment.

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• Non-availability of wage records hampersthe implementation.

• Rural areas have weak administrativeinfrastructure.

• Due to these constraints formal pensionschemes may not be suited to therequirements of workers in theunorganized sector.

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• Government can provide only limitedresources to the workers in unorganizedsector.

• Though there are welfare fund schemesyet to structure them in the desiredmanner, is a difficult task.

• National Social Assistance Plan (NSAP) isone such example.

• However, it, too, has problems ofimplementation.

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• Central & State Governments are havingseveral schemes to provide benefits to theworkers.

• However, there is a need for comprehensivepension system.

• Banking system, Land Revenue authorities,Block development offices, municipal bodies,Gram Panchayats can help in this area.

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Changing Demographics in INDIA

• Fertility rates had dropped from 6.57% in1960 to 3.22% in 1998 and are expected to be2.1% by 2025.

• About 6% of the elderly people do not havesurviving children.

• Life expectancy at age 60 has increased to62.3 in 2000 and is expected to be 75.4 by2030.

• The Indian over 60 may, therefore, grow from76 million in 2000 to more than 218 million in2030.

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Increasing Dependency Ratio• Fear of longevity has compounded by a

state of helplessness.

• Accepted social obligations are breakingdown.

• Efforts are to be built to look for helplinesin the form of insurance, health care andpension plans.

• Aging population has to get old agepension.

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Experience of Asian CountriesChina

• Chinese “Pay-as-you-go” system createdin 1995 needs a re-look because of therapidly aging population.

• Country’s policy of one child perhousehold is undercutting the traditionalfamily approach to care for aged parents,leaving the Government to care for theelderly.

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• Government of China is consideringchanges to fill up the gap which will be ahuge amount by 2005 and further higherby 2010.

• A shift to defined contribution pension is,therefore, being felt there.

• Individual accounts are also beingpermitted which may have a total of 11%annual contribution, 8% by employee and3% from the enterprise.

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Singapore• Singapore Central Provident Fund system

encourages savings for retirement as wellas for housing and health care.

• Also stronger regulations have beendesigned to ensure full advantage of thefund to the public.

• CPF has been a saving vehicle to financeindividuals’ housing, health and otherinvestments enlarging its the role.

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• Members are encouraged to buy annuitieswith their minimum sums.

• There are no private retirementprogrammes to provide retirement benefit.

• Recently investment rules have beenliberalized.

• On the whole, the system has enjoyed agood reputation of effectiveness.

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Hongkong• The current system in Hongkong is

voluntary and can be either defined benefitor defined contribution fully funded.

• Contribution is 5% of employees basicsalary.

• Employer’s contribution normally will notexceed 15% of basic salary.

• Mandatory Provident Fund which startedin the year 2000 will cover all employeesand employers.

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• It is a mandatory defined contribution planwith contribution rate of 10% with equalcontributions from both employees andemployers.

• The funds will be managed by the privatesector.

• There was a lot of publicity about theresponsibilities of employers and employeesand the rights of members.

• With the result the compliance rate was ashigh as 90% of the membership andenrollment right from the start.

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Japan• National Pension provides basic benefits to

all members of society.

• Employer contributions to a qualifiedpension plan are tax deductible as a businessexpense.

• 1/3 of funding for social security retirementbenefits is provided by the Government outof general revenues.

• Voluntary private schemes are there mainlythrough annuity policies falling underindividual life business.

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Malaysia• It is the Employees Provident Fund with

mandatory contribution of 11% byemployees and 12-19% by employers withlumpsum benefit on retirement, death,disability of the employee.

• The compliance rate is quite high.

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Asian Market• Asia is going to be among the fastest

growing market in the world.

• The Region’s renewed economic growthwill support its aim of becoming anattractive pension market landscape.

• Funded systems are growing inimportance.

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Indian Scenario• As stated above, most individuals are outside

the pension scope in India.

• The unorganized sector workers have nostructured social security system.

• IRDA has submitted a report on 31.10.2001 tothe Government of India making somerecommendations for the pension reforms inthe unorganized sector.

• After a prolonged debate on the OASIS report,lot of thoughts have emerged on the pensionsector reforms.

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These are as under:-

• Awareness creation and marketing may becarried out both by the regulator and theproviders.

• Collection of contributions and choice ofschemes may be carried out throughmultiple means and through a variety ofentities like banks, assets managementcompanies, post offices, NGOs and otheraffinity groups.

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• Record keeping for the contributions fromthe customers will be the responsibility ofthe integrated provider.

• Fund management of the contributionsmay be handled within the integratedprovider organization or through aspecialized approved organization.

• Annuity provision will be only through lifeinsurance companies registered withInsurance Regulatory and DevelopmentAuthority.

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• Supervision of the process shall be theresponsibility of the pension regulator.

• The reform system would ensureportability across various schemes withoutany extra charges to be incurred by thecustomers. The regulator shall ensure thatthe incidence of transfer is kept to aminimum.

• This will also support nation-building byproviding long-term funds.

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Suggested Strategies• We should also identify the role of mutual

funds to manage pension funds and to givemaximum benefits through activemanagement of the fund. Cost estimateswill also have to be examined if thepension funds are managed through mutualfunds.

• Establishment of a Pension Developmentand Regulatory Authority.

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Main points in the IRDA’s Report• Financial planning advice and investor

education since the average investor maynot be well informed and sophisticatedabout financial matters.

• Make compulsory the publication ofannual standardized reports providingpension flows, patterns of investments,payouts and expenses.

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• Reviewing fees charged by variousplayers to schedule re-determination ofthese fees to prevent the start-up costsfrom getting embedded in the systempermanently.

• To establish a mechanism wherebycustomer satisfaction, speed of response tocustomer queries, time taken for claimantsto start receiving benefits and at a systemlevel, the mechanism for detection andcorrection of fraud.

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• The system should be a sustainable one,both financially and administratively.

• The question of funding has to be seriouslyexamined to ensure benefits.

• The government institutions should workand be included in the system ofadministration.

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Recommendations for re-buildingpension structure in India

The following recommendations are madefor restructuring the whole system:-

• Adopting defined contribution plansinstead of defined benefit schemes

• Rates to be market driven

• Mobility of the workforce to be allowed

• Executive body and control body must beseparate from each other.

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• There must be a regular valuation byactuaries

• Supervisory Authority should give annualreport and other reports regularly.

• Employees Provident Fund Scheme(1995) and other defined benefit schemesto be reviewed.

• A separate model for employee’s groups –civil service schemes - to be recast.

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Conclusion• Asian countries are showing signs of

tremendous economic recovery.

• The whole process of reforms is lookingup.

• The intention of Asian countries to initiatea change, manage it and build up publicconfidence is being reinforced by itsefforts in that direction.

• India, too, will not lag behind.