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Create Self-generating Pension Fundsnews
Alok Agarwal
24 August 2001

An expert in the field of social security, Mr Mukul G. Asher is deeply concerned about the welfare of the ageing people whose number is growing fast in India. With a view to providing better healthcare and support system, Mr Asher advocates creating self-financing pension funds as is being done by several developed and developing countries all over the world. In an exclusive interview to domain-b, Mr Asher explained to Alok Agrawal how pension funds can meet this challenge without burdening public finance.

domain-b: Why do we need pension reforms?

MA: The basic idea is that people are living longer and they have healthcare needs to take care of. Any developed society will want its senior citizens to live in dignity and with a fair amount of financial security. The present social security arrangements in India are composed of different elements. These are not well integrated and will not succeed in their major objective of providing substantial retirement-income potential to a large proportion of population without impairing Indias international competitive standing.

The schemes should be structured in a manner that makes them self-financing and the burden on the state is minimum. Pension reforms are needed to address issues of social adequacy, coverage and equity and are a part of larger set of reforms. They assist in fiscal consolidation as well as fiscal flexibility and have the potential to generate positive impact on important economic issues such as savings, financial markets, capital markets and rate of growth.

domain-b: What are the trends, internationally?

MA: Large number of countries, at all income levels in all continents, have undertaken pension reforms to make improvements on current arrangements. More prominent among them are Singapore, Australia, Malaysia, Chile, Mexico, United States, Switzerland, Canada, United Kingdom, Argentina, Republic of Ireland, Netherlands, Brazil, Japan, Germany, China, France, Spain and Italy among others.

Chile made substantial reforms to its pension system, which could serve as a model for developing countries. There is an increasing tendency to view pension reforms not in isolation but as an element of complementary reforms in other areas such as financial markets, capital markets, corporate governance etc. It is felt that there is a need for introducing multi-tier system and change/develop them to suit the needs, capacities, objectives and circumstances of a given country.

There is a shift towards funding pension obligations, away from unfunded systems. Pension arrangements of government employees are increasingly being made consistent with those of the private sector employees mitigating marked dualism. Internationally strong linkages between pension systems on one hand and fiscal systems and health financing on the other are developing. There is recognition of the need to perform investment function in funded systems to capture the power of compound interest though in practice, with the exception of the US and to an extent Chile, the whole thing is proving to be a major challenge.

Administrative costs, compliance costs and efficiency are increasingly being recognised as critical issues, particularly in the low and middle-income countries. The importance of developing pension industry, including custodial and other services, is being recognised. Also being recognised is not to leave pension fund governance and management solely in public hands, but to club it with stricter regulatory role for the government.

domain-b: Where does India stand among all these?

MA: India currently has a pension system, which is low, as well as uneven, on coverage. There is a marked dualism between

  • civil servants and the private sector protection levels; and

  • methods of financing and coverage.

Existing social assistance schemes are inadequate and are proving to be inefficient for the elderly poor in the unorganised sector. The existing Indian system can be subdivided into four elements:

  • schemes for the private sector employees (EPFO schemes);

  • schemes for the public sector enterprises (some such as the banks and insurance employees have their own schemes);

  • schemes for civil servants that receive gratuity, provident fund and non-contributory pension including health care; and

  • the informal/unorganised sector, covering about 85 per cent of the workforce, which largely remains uncovered.

Urgent reforms are needed in all four areas. The EFPO schemes need to be more professionally managed with greater accountability, transparency and member empowerment. They need to employ modern concepts of risk-return ratios and investment. For the sake of records the average annual real interest on EPF balances between 1985 and 1997 was 2.63 per cent, which needs to go up to 3 per cent. Another very critical step is the need to substantially increase administrative and compliance efficiency while reducing costs. We must benchmark our standards against international norms.

The civil service pension liabilities has severe adverse impact on fiscal consolidation and fiscal flexibility. Even the viability of the railways and other enterprises has been severely impacted by our current pension liability. There is a strong need to move towards funding. Internationally too there is a general integration of the civil servant with the private sector. The civil servants are no longer getting any largesse and are being made to contribute. India and Malaysia are two countries, which are not asking their civil servants to contribute and continue to pay them. Among Indian states I can cite examples of Mehgalaya, Assam and Maharashtra where statutory obligations are very high. Do not forget that governments have to raise resources for all these payments, which tends to have an adverse impact on their finances.

domain-b: Finally, what advice do you have for India on how should it approach its pension sytems?

MA: India has considerable opportunities to reform its pension system given the depth of its financial and capital markets. It should approach pension reforms as a part of broader macroeconomic and microeconomic reform, popularly termed as the second-generation reforms. It should pursue a balanced approach between pure welfare orientation on the one hand and development/economic goals on the other. It should set benchmarks and then monitor progress because in pension economics seemingly small numbers such as the real rate of return could also make a large difference. A pension system must be viable for about seventy-five years. Therefore there is need to think long-term.

also see : Pension funds --- reforms a top priority area

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