6th Annual IIEF Pensions Sector Summit 2004
Opening Remarks by
Sudipto Mundle
Deputy Country Director, India Resident Mission
Asian Development Bank
New Delhi
8-10 November 2004
Dr. Kirit Parekh, Prof. Mukul Asher, distinguished delegates from India and abroad, ladies and gentlemen.
It gives me great pleasure to welcome you on behalf of the Asian Development Bank and India Pension Research Foundation to this very important workshop on India's pension reforms. I also thank the Department of Economic Affairs, Ministry of Finance, Government of India for supporting this event and the Invest India Economic Foundation for all its efforts in hosting and putting this together. I would also like to thank each one of the distinguished guests present here for joining this workshop.
Social security reforms have attracted increasing attention across the world over the past decade. Rapidly aging populations in many countries have challenged the fiscal sustainability of the pension system based on the defined benefit principle. India is no exception. The fiscal sustainability of the formal pension system is likely to become a major long-term. This stems in part from the increased life expectancy in India due to improved medical and health care. It is estimated that the total population of aged is rising from 55 million in 1991 to 113 million in 2016. We have to find ways and means through which this growing number of the aged can be taken care of during the period of retirement.
In the organized sector, government employees enjoy a non-contributory, inflation indexed, defined benefit pension, funded entirely by the government. The system operates on a pay-as-you-go basis. The provident fund system for even non-government employees in the formal sector now has a sizable component of defined benefit schemes. Hence, the need for reforms to make the system affordable. Unless some system of funding is initiated, the burden can become unsustainable. Another important goal of pension reforms is to increase the flow of long-term institutional savings and boost the overall development of the financial market. As pension funds are long-term in nature, the bulk of these could be invested in long gestation infrastructure projects, for which there is a perceived financing gap.
However, the informal sector constitutes only about 10% of the workforce in India. The remaining 90% of the workforce is in the unorganized sector and the real challenge is how to design a pension system, which can provide some income security to the elderly in this vast informal sector during their old age. The problem is particularly serious for women who have longer life expectancy than men and often do not have any independent source of income. We need voluntary privately managed pension schemes that can be offered to all eligible participants from the unorganized, or informal, sector of the Indian economy. At the request of the Government, ADB is providing technical assistance for the development of a pension system for the unorganized sector. The Government has also requested ADB to provide technical assistance to selected state governments in India for reform of their civil service pensions.
I would like to place these two technical assistance projects in the larger context of ADB assistance for financial sector development in the Asian region as a whole. Financial sector operations are an important part of ADB assistance programs for developing countries in Asia, and reform and further development of pension systems and the insurance industry are key components of such assistance. This reflects three basic considerations. First, pension programs and the insurance industry are central components of a country's capital market. They are important instruments for mobilizing long term savings and are generally the largest holders of long term securities. Without financially viable and market oriented pension funds and insurance services, it is not possible to develop modern capital markets. Second, it has become increasingly clear in recent years that in many countries existing pensions programs and insurance services suffer from major managerial and financial problems and are not viable. At the same time, mounting fiscal pressures have made it difficult for governments to bail out programs that are in financial difficulties. As countries across Asia have launched efforts to achieve greater fiscal discipline and reform their financial sectors, especially following the financial crisis of 1997, ADB has provided support for developing capital markets, especially pension funds and insurance services. Third, there is now greater recognition that pensions and insurance can play a critical role in a country's poverty alleviation efforts. These are no longer regarded as financial services only for the rich and middle class, but as basic elements of a country's social security system for the poor. ADB has accordingly become increasingly interested in supporting efforts to extend the reach of these programs to workers in the informal sector.
The immediate priority in India is to improve the legal and regulatory framework for pensions and insurance, improve the managerial and financial performance of existing services, and extend their coverage where feasible to the poorer sections of society. In the specific context of India's pension services, this immediate need is best met through the two ADB technical assistance projects that I have mentioned earlier.
Our current work on pension reforms is part of a larger, sequenced package of support provided by ADB for the development of India's financial sector. In the past ADB supported reforms in the capital market through several loan and technical assistance projects. Building on the success of these early interventions, ADB provided advisory support through two projects in 1999 and 2000 focused mainly on the development of contractual savings institutions in India. The first project was designed to support reform of the private pension and provident fund systems and the Employees Provident Fund Organization, while the second supported policy and operational reforms in the insurance sector, and Capacity Building for the Insurance Regulatory Development Authority. Both these exercises were very well received by the concerned institutions and the Government as they help in the development of new sources of long-term finance for both industry and infrastructure.
As a continuation of the above interventions to help the mobilization of long term savings, ADB is now providing Technical Assistance to develop pension schemes for the unorganized sector. As we have a separate session on this particular project I do not wish to dwell any further on this, except to say that by the time the project is completed by end April 2005 we expect to have in place pension schemes that meet the needs of the unorganized sector, as envisaged by the government, and appropriate marketing strategies laid out to reach the potential target markets.
The second Technical Assistance project we are developing relates to State level pension reforms. The growing pension liabilities of the State Governments have been receiving increasing attention from policy makers, especially in the context of the fiscal stress being experienced by many States. The roadmap for future pension reforms was laid down in the reports of the two committees on pension reforms constituted by the Ministry of Finance, and the Reserve Bank of India. Both the committees recommended a switch from a defined benefit scheme to a defined contribution scheme. The RBI Committee, which deliberated at length on the pension liabilities of the states, indicated that pension payments would pre-empt 30% of states' own revenue and 20% of their total receipts by 2010-11. Against this backdrop of mounting pension liabilities and the deteriorating financial position of the states, today almost all states are increasingly concerned about the sustainability of existing pension schemes, and their fiscal implications. In principle, states can (i) offer the new pension system (NPS) to their new employees, or (ii) consider a variety of systemic and parametric reforms for existing employees that could be either voluntary or mandatory. These aspects will be thoroughly discussed over the next three days at this workshop. ADB is happy to be associated with the proposed state level pension reforms. It is expected that about 5-6 states will benefit from the proposed ADB assistance. I am told that several additional states will also benefit from a similar World Bank project.
In conclusion, let me say it is well known that because of India's vast population, the Millennium Development Goals cannot be achieved globally if they are not achieved in India. Hence, ADB regards its development partnership with India as critical for accomplishing these goals in Asia, and support for financial sector reform is a key component of the relationship. The support for pension reforms both for the formal and informal sector is an integral part of this much larger picture. As many of you know, providing social security for the informal sector, which accounts for 90% of workers in India, is an important component of the Government's National Common Minimum Program. I am delighted to see that this ADB supported initiative on pension reforms is very much in tune with the government's strategic goals of achieving growth with equity. I wish your deliberations all success and look forward to your conclusions.
Thank you.
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