Pension sector in India and China require major reforms: Study

NEW DELHI: Old-Age dependency ratios in India will worsen from eight in 2005 to 21 in 2050, due to falling fertility planning, according to a survey ‘Asia-Pacific Pensions 2007: Systems and Markets’.

Conducted by Allianz Global Investors, one of the world’s largest asset management companies, the study involved pension markets in nine economies including India, China, Hong Kong, South Korea, Taiwan, and Thailand and the wealthier markets with developed pensions systems such as Australia, Japan and Singapore.

To understand the necessity of reforms and the ability of existing pension systems to cope with demographic changes in an international comparison, Allianz Dresdner Economic Research developed the Allianz Pension Reform Pressure Gauge. This is an indicator to measure pressure on governments to reform pension system by studying sustainability of existing pension systems and the resulting need to reform.

India and China rank as having the maximum pressure to reform its pension system among the nine economies studied. The variables used to arrive that the indicator includes, current and future demographic situation, size of government debt, coverage of the main pension system, replacement ratio and the retirement age. “India’s pension policy challenges differ from those of other Asian countries. While most other countries face a severe demographic challenge, Indian demographics will develop more favourably,” the survey said. Only around 12% of the population is covered under any formal pension arrangement in India.

The survey cautioned that the process of restructuring its pension system to increase coverage of formal pension systems in behind countries such as China, which has already established the foundations for a nation-wide system for the elderly. But it also says since the Indian population will age slower than China, India will have a longer time period to frame pension system solutions. The survey notes that pension reform across the Asia-Pacific region is driving dramatic growth in assets and that defined contribution (DC) will be vital to cope with demographic problems.

The survey is upbeat about the pension market potential in India since international asset managers are eligible to run funds in the New Pension System as joint ventures. “Apart from the three asset management licence already granted, it is likely that more will be auctioned in future,” it said.

It assumed an ‘optimistic scenario’ with a participation rate of 30% among high-income earners, which will rise to 50% with a savings rate of 6% of the wage above the mandatory contribution rate. Under these assumptions, pension assets will amount to $241 billion by 2015. In a ‘conservative scenario,’ with half the participation and savings rate, the pension assets will amount to $204 billion.

The projection is based on the UN population data and workforce and employment data provided by the Asian Development Bank (ADB). The ADB reports a labour force of 380 million, of which 300 million work in the unorganised sector, especially agriculture. The survey also factored in a shift from employment in agriculture to industry and services.