ADB Assisting India in Developing New Pension System

MANILA, PHILIPPINES - The Asian Development Bank (ADB) is assisting in India’s transition to a new pension system that will help secure the financial future of India’s aging population.

India undertook wide-ranging reforms of its pension system in 2003, including the establishment of an interim Pension Fund Regulation and Development Authority and the introduction of a defined contributory pension system called the New Pension Scheme (NPS). At present, participation in the NPS is mandatory for central government employees, while those working in state governments and other public and private sector employees, self-employed professionals and informal sector workers may join the scheme voluntarily.

The Japan Special Fund is providing a $1 million grant for the project. The grant will be managed by ADB. The grant will help establish a broad-based income security system through pensions, especially for the informal sector workforce. This should help ease the fiscal burden of the Government and contribute to the development of the national capital market, as pension funds are important sources for long-term funding.

“India lacks income security coverage and cannot sustain the fiscal burden of its existing pension system,” said Cheolsu Kim, Principal Financial Sector Specialist of ADB’s South Asia Department. “The liability related to the unfunded pensions compound India’s public debt problem. The existing pension system is inadequately funded and unsustainable.”

The recurrent expenditure for the central Government pension system has grown from 0.6% of gross domestic product (GDP) in 1993 to 1.7% in 2002, while total pension liabilities have risen from 9.7% of net tax revenue to 12.7% during the same period. A recent study estimated India’s unfunded pension liability at $426.9 billion, or 55.9% of GDP, in 2004, further exacerbating the country’s already high level of national debt, which accounted for 84.9% of GDP for the period.

The central Government deposits contributions under the existing pension scheme in individual accounts, and the investment returns are not based on market rates and the supporting infrastructure to implement the NPS has not been fully established.

The grant will help the Government transition to the NPS and develop the supporting infrastructure. This will require the Government to provide proper pension products with adequate coverage, develop marketing channels through service providers, supporting institutions, such as the central record-keeping agency, and pension fund managers. Pension service providers need to become capable of delivering quality services to targeted beneficiaries to widen participation in the scheme and ensure regular pension contributions.

ADB assisted India’s pension reforms of the Employees’ Provident Fund in 1999, the unorganized sector in 2003, and selected state governments in 2004.