World Bank praises pension reform in India
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World Bank praises pension reform in India

By agencies   |   Tuesday, 24 May 2005, 07:00 Hrs
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WASHINGTON: Praising the recent reforms in India's pension sector, the World Bank has said regardless of the speed of the transition, it represents a fundamental policy shift in the long run.

"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," a World Bank study on "Old Age Income Support in the 21st Century" said.

It notes that from January 1, 2004, all new federal government hires contribute 10 percent 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," it said.

Several state governments, including Andhra Pradesh, Karnataka and Tamil Nadu, it points out, have announced that they intend to join the new scheme, and other states seem likely to follow.

While many details of the design have yet to be spelled out, for example, the process of selecting asset managers and the central record keeper, structure of charges and so forth, the reform stands out because it does not retain an unfunded defined-benefit scheme in the long run."

Regarding investment policy, it points out, the Employee Pension Fund Office in India has undertaken a review of asset allocation, which historically has been concentrated in government-backed securities.

The most important reforms in the region, the Bank says, are driven by the fiscal burden of civil service pensions. The most ambitious effort to date is the systematic reform in India. State and Federal outlays on pensions now consume around 15 percent of the tax revenues after doubling over the course of the 1990s.

The schemes that cover private sector workers in South Asia, says the Bank, are either provident funds (Nepal, Sri Lanka) or immature benefit schemes with a high ratio of workers to pensioners (India, Pakistan). These schemes continue to experience positive cash flows and are a convenient form of government financing through their purchase of government bonds.

These state monopolies are not within problems, including poor service to members and manipulated rates of return. Also, the newer defined-benefit schemes have amassed dangerous long-term liabilities. The long-term sustainability of these programs in their current forms is in question, but none of these programs appears to face financial collapse in the next few years.

In contrast, the pension schemes covering public sector workers have always been financed directly from the budget. With the exception of Bhutan, the entire region maintained the inherited British non-contributory defined-benefit schemes that were completely unfunded. As these schemes began to mature, the magnitude of the hidden pension debt became increasingly obvious.

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