Opportunities and difficulties in Indias pension reform

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Opportunities and difficulties in Indias
pension reform

• Robert Palacios
• South Asia, Social Protection, World Bank
• New Delhi, January 7, 2005

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• The importance of Indias pension reform
• The opportunities it presents for India
• The difficulties that must be overcome

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The importance of Indias pension reform some
perspective

• Indias pension reform is arguably the most
  important in the world today
• First, it represents a historical shift in the
  provision of civil service pensions that goes
  back to the pre-colonial era
• Second, it is the most important recent example
  of paradigm change or systemic reform in pension
  provision

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The opportunities it presents for India

• Controlling an exploding pension liability
• Providing a sustainable platform for pension
  provision to an ageing India
• Generating a source of long term savings to
  invest through the financial markets

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Controlling an exploding pension liability
Compared to other countries
over time
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Controlling an exploding pension liability

• fiscal accounting hides the pension debt, but
  it is real nonetheless
• crude estimates in World Bank (2001) suggested
  order of magnitude at 1/3 of GDP
• More recent, detailed estimates for Tamil Nadu
  show similar figure relative to GSDP
• Reform stops accruals, make true fiscal picture
  more transparent

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Providing a sustainable platform
Benefit levels with a 20 contribution rate
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Providing a sustainable platform

• Convergence of EPFO
• Increased role for voluntary pension provision
  especially with changes to taxation of savings
• Plugging in existing group schemes
• Shifting younger civil servants along with new
  entrants
• Growth and natural coverage expansion

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Providing a sustainable platform
Coverage of EPFO vs income per capita for Indian
states
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Generating source of long term savings

• Increase in savings depends on how new
  contributions are financed
• Research shows positive impact of pension funds
  on capital markets
• Improved regulation, credit rating other
  standards
• New demand for long term instruments
• Chiles mortgage bonds, Mexican corporate bonds
• Potential positive impact through corporate
  governance

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Generating source of long term savings
Accumulation of assets over next 30 years
Source InvestIndia, I-TAP model
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The difficulties to be overcome

• Fiscal accomodation of transition (exogenous)
• Appropriate staffing and budget for PFRDA
• Collection and record-keeping the CRA
• Administrative costs and selection of PFAs
• Educating workers on investment decisions
• Survivors and disability insurance provisions
• Annuitization at retirement

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Conclusions

• Indias is the most important pension reform in
  the world today and the basic concept of the
  scheme is sound
• To succeed, however, a number of difficult
  implementation issues must be addressed
• The reform provides an opportunity for a robust
  pension sector that could have far reaching
  implications for capital markets
• A positive impact will be magnified to the extent
  coverage expands quickly which in turn, depends
  on demonstrating early success