Pension business in India: Discussion

Abstract

All over the world there has been a tendency to switch over from the defined benefit to the defined contribution form of funding pensions. Liyaquat Khan, President, Actuarial Society of India, summed up the reasons as globalisation, which has caused a high flux of employees across organisations and countries, the weakening of trade unions, and the decreasing rate of interest which led to employers finding it difficult to sustain funding. India can learn from the experience of other countries. He emphasised the role of actuaries and the need for holistic regulatory measures to regulate pensions.

S P Subhedar, Senior Advisor, Prudential Corporation Asia, outlined a suitable model for regulation and supervision of pensions in India, in the context of a separate regulatory authority mooted under the current reforms. Prof Jyothilakshmi of IIMB raised the main issues of concern in the pension system: poor coverage, varying benefits, escalating expenditure and the risk of underfunding, and premature withdrawal of funds. She stressed the need for better asset management, administration and record keeping, and consumer awareness and education. Prof Shubhabrata Das of IIMB shared the initial results of a field research on pension perceptions. It emerged that about 10% of the workforce expect complete support in their retired life from their children while another 35% expect partial support. While there was a relatively high degree of awareness about the Voluntary Pension Plan (VPP), only 20% had bought one. Insurance companies were the preferred channel for buying VPPs. Rate of return and promptness in account settlements were what people looked for most.

B K Bhattacharya, who as Central Provident Fund Commissioner had presented the Bhattacharya Committee Report on the central government pension reforms, 2002, pointed out that despite its lacunae, the Indian pension system had not done too badly as out of a total of 47 million salaried people in the country, 75% to 80% were covered by a pension scheme. The state government pension schemes not only cover the state government employees but employees of local bodies, municipalities, corporations and grant-in-aid institutions. With the salaries, pension and interest exceeding 100% of the revenues of the state government in some states, some tough decisions involving structural as well as parametric changes are called for.

Prof Mukul Asher of National University, Singapore, pointed out the need for professionalism and sound economic and management reasoning in social security schemes; the need to look at pensions, provident funds, voluntary savings, etc as components of a social security system; the need for international diversification of pension assets; and for accountability and transparency. Causes for concern are the stagnant employment in the organised sector and the human resource policies of the pension regulatory authority.

Presenting perspectives from insurance companies on the pension business were R Krishnamurthy, former CEO of SBI Life, and Venkatesh Mysore of Metlife. R Krishnamurthy questioned whether, with a low per capita income and with little social security benefit available to the general population, we are perhaps pushing too radical a reform by introducing a universal pension scheme with undefined pension benefits based on a defined contribution approach, without preparing the target beneficiaries sufficiently. Venkatesh Mysore listed the critical factors of success in the pension business as expertise in investment management, building distribution, cross selling through the right intermediaries, large amounts of capital and asset-liability management.