NEW DELHI, India -- Despite the prospect of pending elections this fall, the Indian government is moving ahead with pension reform on three fronts.
If adopted, changes could make it easier for foreign money managers to pitch to Indian pension funds, and would permit insurance companies to manage pension assets.
The changes under discussion include:
* establishing an independent regulator for provident and pension funds;
* boosting participation rates in retirement plans; and
* liberalizing investment rules.
Says regulator needed
A senior official of the Central Provident Fund, which manages most Indian provident and defined benefit pension funds, said a central regulator is necessary to create a standard set of rules.
Indian provident and pension funds now total about $62.5 billion in assets. More than 40,000 pension funds are managed by the Employees Provident Fund Commissioner Radhe Shyam Kaushik. Another 3,000 private pension funds are being managed by independent private trusts. Three other government pension funds cover railway workers, the armed forces and postal employees.
The Central Provident Fund official said that with so many funds there always is a difference in how rules are being followed. For example, he said, one provident fund might deduct 8.5% of pay as a contribution while another would deduct about 10%.
Government efforts also are focused on increasing participation in retirement funds. In February, a select government committee on pension funds had recommended lowering, in two stages, the threshold for participation to employers with as few as five workers. Now, employers with fewer than 20 employees are exempt.
Less than half covered
Only 49% of salaried private-sector workers are covered by provident funds, which are industrywide defined contribution plans that provide lump-sum benefits.
Other private-sector workers, including self-employed and agricultural workers, comprise 28% of the population and are not covered by any retirement plan. The remaining 23% of the population are government workers who participate in defined benefit plans funded entirely by state governments.
Meanwhile, Indian policy-makers are pushing ahead with plans to increase the amount that can be invested in domestic stocks (Pensions & Investments, March 8).
The Central Provident Fund now must invest at least 40% of assets in state-owned companies, 25% in government securities, and 10% in other areas, including domestic stocks and bonds. Investment outside of India is not permitted.
Gautam Bhardwaj, secretary of the Dave Committee, which called for pension reforms in its February report, said funds should be allowed to invest 10% of assets in equity index funds for at least five years. Assets would track "Nifty Fifty" stocks -- a weighted average of 50 National Stock Exchange blue-chip stocks -- and the Mumbai Stock Exchange index of 100 large-cap stocks.
Mr. Bhardwaj said the committee is expected to release its second report on pension reforms by September. It will call for relaxing of the investment guidelines and doubling of tax-free pension contributions to 120,000 rupees ($2,800) a year.
The reforms also would encourage foreign money managers to enter the market.
Sandy Davidson, business development representative for London-based Commercial Union PLC, said: "We are certainly looking at individual and group provident fund schemes, which are still untapped in India." Commercial Union Assurance and its local joint venture partner, Hindustan Times Ltd., New Delhi, will offer such schemes when the rules are liberalized, said Mr. Davidson, who is based in New Delhi.
In addition, a Jardine Fleming executive, who asked to be unnamed, said the Hong Kong-based firm is discussing with local risk management firms and banks about entering the Indian market but would not do so until a stable government is elected. Otherwise, it is unlikely a pension reform bill would be enacted, he said.