Distributors should be incentivized adequately in order to increase penetration of pension funds in India, said Rupa Kudwa, Managing Director & Chief Executive Officer, CRISIL while releasing research findings on pension funds.
A CRISIL research report titled ‘When India Ages, Whither Pension for All?’ shows that the old age population will grow to over 300 million by 2050 and 181 million by 2030, from 100 million currently. “The worry is that most of them will be financially insecure in their sunset years if a social security net in not built right now. And if a large number of old age population end up having no pension by 2030, the government will have to bear the heavy fiscal burden of providing minimum sustenance to them. A multifold increase in pension coverage to the private-sector workforce is therefore an imperative,” states the report.
To overcome this challenge, Rupa Kudwa, Managing Director & Chief Executive Officer, CRISIL said in a teleconference with media that the pension fund industry requires a robust distribution network to expand its footprint and this could be achieved only by encouraging distributors through adequate fiscal incentives. “Just like mutual funds and insurance, distributors should be incentivized adequately in order to increase penetration of pension funds in India, said Rupa.
CRISIL Research has built a best-case scenario where pension coverage expands such that 70% of the private-sector retirees by 2030 (63 million) will get a pension compared with just 8% (4.8 million) now. Even if this happens, and the government has to provide pension to only 30% of the old (in addition to retired government employees by 2030) its pension bill will rise by 120 basis points to 3.4% of GDP by 2030 from around 2.2% currently, assuming each pensioner gets Rs. 2,000 every month.
Under the worst-case scenario, if private-sector coverage stays chronically low at its current level of 8% by 2030, the government will have to formulate a pension scheme to support the entire population of the old. This will raise the fiscal burden to as high as 4.1 % of GDP, assuming a monthly payout of Rs. 1,000 per pensioner – or half the amount in the best-case scenario. While all old citizens will receive pension through such a scheme, the amount each one gets will be significantly lower than in the best-case scenario because of the sheer number of dependents.
The report cautioned that the country will have to face fiscal burden of pensions if government does not put in place an effective mechanism to increase the penetration of pension funds.
Dharmakirti Joshi, Chief Economist, CRISIL said “India is not the only country set to witness a steep increase in old-age dependency. Indeed, the proportion of its old people will be less than those of several countries and also the world average in 2030. But the rise from where we stand today will be steep – hence the need to act fast.”
Joshi attributed the poor penetration of pension funds to lack of awareness, high proportion of employment in informal private sector, high inflation, unattractive incentives to distributors and absence of EEE (exempt, exempt and exempt) structure in NPS.
To increase the penetration of pension funds, Joshi suggested that the government should focus on creating awareness, generating formal employment through new projects, easing interest rate, providing tax benefits and building a robust distribution network.
