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Wednesday, May 25, 2005

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National

World Bank hails India's pension reforms

Special Correspondent

"Fully-funded defined-contribution scheme a fundamental policy shift"

NEW DELHI: The recent opposition to the role of private players in pension funds notwithstanding, the Indian Government's efforts towards ushering in reforms in the pension sector has come in for a pat from the World Bank, especially as it marks a ``fundamental policy shift in the long run.''

In a study on `Old age income support in the 21st century' released on Tuesday, the World bank has said: ``Regardless of the speed of the transition, the Indian reform represents a fundamental policy shift in the long run, with a non-contributory, unfunded defined-benefit scheme being replaced by a fully funded defined-contribution scheme.''

The study has noted that from January 1 last year, all new employees of the ``federal government'' are mandated to contribute 10 per cent of their salary to a defined contribution scheme, with a matching contribution from the Government as employer.

``The mandate applies only to new entrants, but the possibility that those already covered by the old defined benefit scheme may be given the choice to switch is being discussed,'' the World Bank study said, while noting that several State Governments such as Andhra Pradesh, Karnataka and Tamil Nadu have announced that they intend to join the new scheme, and other States seem likely to follow.

While conceding that many details of the design (new scheme) are yet to be spelt out, such as the process of selecting asset managers and the central record keeper, structure of charges and the like, the study maintains that the basic reforms still stand out as ``it does not retain an unfunded defined-benefit scheme in the long run.''

On the investment policy issue, the study points out that the Employee Pension Fund Office (read Organisation) in India has undertaken a review of asset allocation, which has been concentrated in securities backed by Government.

The reforms in the region, the Bank has noted, are driven by the fiscal burden of civil service pensions and, till date, the "most ambitious" effort to rectify the situation ``is the systematic reform in India,'' especially as the ``State and Federal outlays on pensions now consume around 15 per cent of the tax revenues.''

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