Interview

Sanjay Sachdev

Chief ExecutiveOfficer

IDBI Principal Asset Management Company

Can you tell us briefly about the need for pension reforms in India?

India is, today, in the phase of rapid demographic transition. Consider these compelling facts. The average life expectancy of an Indian is projected to be around 80 years by 2020, bringing in an expected life span of 20 years beyond the age of 60.

In fact, the number of old people aged 60 and above is also expected to move to 8.9 per cent of the population, or around 13.5 crore individuals, by 2016.

Thus, the average Indian worker will need adequate savings to support approximately 15-20 years of retired life once he or she crosses those productive working years.

With increased life expectancy, coupled with collapse of traditional modes of income security like joint family systems, there will be a greater burden on our pension system going forward.

Today, retirement savings invariably go into government paper, and in the process, increases long-term liabilities substantially. The majority of workers, around 90 per cent of the working population, are today engaged in the unorganised sector.

The unorganised sector (which accounts for more than 50 per cent of the total labour force), includes professionals such as doctors, lawyers and small businesses all over the country, account for over 75 per cent of the population, and have no access to any formal pension-saving system for old- age economic security.

What can the government do to put in place a vibrant pension system for the country?

There is a need to have a sound regulatory framework to regulate the pension business. This would give individuals a fair degree of confidence with respect to risk management, mis-selling and prevention of fraud.

To achieve this objective, we recommend the setting up a Pension Regulator. This could be a separate Indian Pensions Authority, which regulates the pension business, under the aegis of the Insurance Regulatory Development Authority.

The task of providing pensions could be divided into the "accumulation" and the "pay out annuity" stage. Only pension managers and administrators could be allowed to participate in the accumulation stage, while pay out annuities could be the exclusive domain of the Life Insurance Companies.

3. Investment management expertise, coupled with the capability of offering a combination of administration and low cost transaction processing would significantly benefit Indian citizens.

Asset management companies have the infrastructure to develop and offer pension products, and the investor should be given the choice and flexibility in terms of selecting his fund manager and annuity provider.

We recommend the opening up of the Indian pension sector to asset management companies and specialists in retirement products, who have demonstrated strong administrative, record keeping and investment management skills. Regardless of competing pressures, the new pension system should ensure the well being of individuals who are preparing for old age.

Individuals participating in the pension system should have incentives to take interest in the functioning of the system and block appropriations of their retirement savings.

The challenge in building a pension system also lies in obtaining low administrative costs, nation-wide collections and adequate simplicity for participation for millions of people with limited financial sophistication and means. These initiatives can go a long way towards achieving this objective.

How large is the pension industry in other markets like the US?

The US 401(k) scheme, launched 22 years ago, has $ 2.1 trillion dollars in assets, 45 million participants and is growing at 15 per cent per year. Truly, the time has now come for the Government to urgently move ahead, and open up the Indian pension sector to private players.