New Delhi: As more and more working people join the organized sector, India’s pension fund (PF) market is set to grow at a rapid pace to reach about Rs 20 lakh crore by 2015 from the present level of about Rs 15.4 lakh crore apex industry body ASSOCHAM said today.
The PF market in India is growing at a compounded annual growth rate (CAGR) of about ten per cent according to a study titled ‘Financial Markets: Time for Next Generation Reforms’ released by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
There is enormous potential for pension market in India as over 30 crore working age employees in the country lack formal pensions which are limited to government workers and to companies that employ more than 20 people while over 80 per cent of India's working population is in the unorganized sector without the regular salary and benefits of formal employers, according to the ASSOCHAM study.
“Pensions comprise of one of the largest components of government expenditures and are set to increase further,” said Mr D.S. Rawat, secretary general of ASSOCHAM while releasing the study.
“There is a huge scope for growth in India’s PF market owing to a low existing coverage and large workforce in the unorganized sector, vast majority of which has no pension which also provides massive opportunities for the private sector and foreign players to enter the pension market in India,” said Mr Rawat. “Large scale reforms are required to ease pressure on the treasury, to provide for a social security net for growing numbers of senior citizens as well as a growing workforce as only about 12 per cent of the working population in India is covered by some form of retirement benefit scheme”.
Amid other growth drivers which make India a potential market for the pension fund industry include - favorable savings pattern, growing life expectancy, growing desires for better living standards after retirement and government initiatives vis-a-vis pension reforms and the New Pension Scheme (NPS).
Considering that Indian commercial banks face difficulties in financing infrastructure projects owing to the asset-liability mismatch as funds are required for over a period of 15 years or so while deposits are of shorter maturity, therefore, there is a need to intermediate greater amounts of pension funds into infrastructure, highlights the ASSOCHAM study.
“The government alone cannot invest huge amounts of money required to shore up the physical infrastructure like – expanding the road, rail networks, building more power plants, ports etc across the country thus substantial portion of funds for this should come from long-term source of pension funds,” said Mr Rawat. “There may be a gap of about 30 per cent in infrastructure funding requirement, targeted at Rs 41 lakh crore in the 12th plan (2012-17) and we need to tap the pension and insurance funds to bridge this gap and for this we need to strengthen the corporate bond market and develop credit enhancement mechanisms for accessing long term funds available with these funds.”
In its study ASSOCHAM has also mentioned about the huge scope for foreign direct investment (FDI) in pension fund industry considering that amidst a slowing economy witnessing a fall in corporate performance the private sector too is having monetary constraints to fund huge infrastructure projects and thus to fill this gap, pension fund investments into infrastructure seem to be a befitting alternative given the match of interests for both these sectors.
The global funded pensions market (both occupational and work related) has a size of over $ 24.6 trillion and over $ 16 trillion is held by pension funds alone.
Assuming that opening up of FDI in pension funds shall help India in attracting slightly more than one per cent of the total pension funds held by pension fund companies worldwide, India would be able to raise the share of pension fun assets to GDP from the current level of five per cent to about 17 per cent by 2017 which would result in assets worth $ 165.85 billion, highlights the ASSOCHAM study.
“FDI in pension funds would further increase the volume of assets that can be invested into infrastructure and help in realizing the infrastructure needs of India,” said Mr Rawat. “The long term income streams, stability, predictable cash flows, low default rates, diversification and the overall benefits to the society at large are certain characteristics of infra projects that assist in attracting investments from pension funds.”
However, long-term investors, such as pension and insurance funds have had a limited presence in Indian market due to regulatory restrictions.
ASSOCHAM has thus batted for financial sector reforms to continue to offer products and services to meet financing and risk management of the needs of infrastructure projects.
Pension products account for over 30 per cent of the total insurance market. Prominent players in the industry, including Life Insurance Corporation of India (LIC), SBI Life, ICICI Prudential, HDFC Standard Life, TATA AIG Life and others.
The pension system in India is divided under three pillar schemes – Civil Service Pension System (CSPS), Employees’ Provident Fund (EPF), Public Provident Fund (PPF).
The CSPS scheme covers the salaried workforce under government employment, both at the central and the state level and the entire pension obligation is charged to the government and employees do not have to make any contribution.
While the EPF is about the benefits available in the old age depend on the contributions and interest, paid as lump sum. The EPF funds are required to be invested in accordance with the government of India’s stipulated investment pattern.
Considering the absence of any mandatory pension plan for the unorganized sector the 3rd pillar scheme of PPF was introduced by the government for workers in the unorganized sector to enable them to accumulate savings for their retirement. This scheme is open to subscription for all citizens on a voluntary basis and the members of the PPF can contribute between Rs 500 and Rs 1 lakh per year.
National Old Age Pension (NOAP) and Employees’ Pension Scheme (EPS) are other schemes of Indian pension system.