New Delhi: Allowing foreign direct investments in the pension sector will enable the country to raise the share of fund assets to GDP from current level of five per cent to 17 per cent which in turn can result in assets worth 166 billion dollars (about Rs 8.6 lakh crore), industry body ASSOCHAM said today.
FDI in pension funds will further increase the volume of assets that can be invested into infrastructure. India requires one trillion dollars (about Rs 52 lakh crore) for infrastructure investments during the 12th Five Year Plan (2012-17).
The global funded pensions market (both occupational and work related) is estimated at 24.6 trillion dollars of which 16.2 trillion dollars are held by pension funds. Permitting FDI in pension funds will give access to global pension fund companies to the vast untapped Indian market, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its recent study titled ‘Case for Allowing FDI in Pension Funds.’
A 2.1 per cent allocation of total pension fund assets to India will increase its reserves to 342 billion dollars – about the same in Brazil in 2010. “Going by the world trends, equity allocation of these could be as high as 160 billion dollars. A CAGR of 16.5 per cent as witnessed in Brazil will result in total pension assets of 734 billion dollars of which equity will be 345 billion dollars,” said secretary general D.S. Rawat quoting the study.
Even if one-third of it goes into infrastructure development, it will mean an investment of over 100 billion dollars – or one-tenth of total requirement in the 12th Plan period. At present, pension and insurance funds have a limited presence in the Indian markets due to regulatory restrictions.
In 2011-12, only 4.7 per cent of funding requirement – or Rs 13,289 crore – is likely to have come from pension and insurance funds compared to 10.5 per cent or Rs 29,851 crore from external commercial borrowings. The estimated debt requirement is to the tune of Rs 2.84 lakh crore in current fiscal and Rs 9.88 lakh crore in the 11th Five Year Plan.
High levels of investments cannot be financed by traditional sources of public finance. Amid falling corporate sector performance, even the private sector has monetary constraints to fund huge infrastructure projects. Also, global risks like the current Eurozone crisis need to be countered.
The allocation of pension assets typically is 47 per cent in equity, 33 per cent in bonds, one per cent cash and the remaining in other areas. In India, 22.9 per cent could be in equity, 16.1 per cent in bonds and the rest in others.
If pension funds are diverted to infrastructure projects, they bring long-term income streams, stability, predictable cash flows, low default rates, project diversifications and societal benefits. “It is imperative that financial sector reforms continue to offer products and services for meeting financing and risk management needs of infrastructure projects,” said the ASSOCHAM study.
A vast majority of India’s population is not covered by any formal old-age income scheme and is dependent on their earnings or transfer from family members. The unorganised sector has no access to formal channels of old-age economic support. Only 12 per cent of the working population in India is covered by some form of retirement benefit.
The implications of demographic dynamics for pension planning become more evident when one takes into account the average life expectancy of 77 years which is likely to rise to 80 in the next three decades. The population above 60 years of age by 2030 will approach 200 million.
“Large-scale reforms are thus required to ease the pressure on treasury to provide for a social security net for growing number of senior citizens as well as growing workforce.”