Keywords: 80 million elderly; restricted coverage; unorganized sector; low mortality: growth opportunities.

Transcription

1 SECTOR ANALYSIS India: The Pension Market Date February 2014 Our ref. AJ Prepared by Trade Council India, Keywords: 80 million elderly; restricted coverage; unorganized sector; low mortality: growth opportunities. Abstract: This report provides a short overview of the Indian Pension market. It describes the industry and its potential, with focus on opportunies for Danish companies. The mortality charecterstics of high income group government employees are more or less in line with the OECD population. This gives a lot of opportunities for growth within the pension/life insurance sector in India. The Trade Council, Embassy of Denmark, India Page 1 of 10

2 Table of contents Introduction: Pension in India... 3 Government Pension Providers... 3 New Pension Scheme (NPS)... 3 Employees' Provident Fund Organisation (EPFO)... 5 EPFO vs. NPS... 5 Public Provident Fund... 5 Private Pension Providers... 6 Life Insurance Corporation of India (LIC)... 6 SBI Life Insurance... 6 UTI Retirement Solutions Limited... 6 IDFC Pension Fund Management Co. Limited... 6 Kotak Life Insurance... 7 Reliance Life Insurance... 7 Recommendations and opportunities for Danish companies... 7 Contact... 9 The Trade Council, Embassy of Denmark, India Page 2 of 10

3 Introduction: Pension in India India has nearly 80 million elderly people, which is one eight of the world s elderly population. This segment is growing at a rate of 3.8 per cent per annum, against a rate of growth of 1.8 per cent for the overall population. Pension policy in India has primarily and traditionally been based on financing through employer and employee participation. As a result, the coverage has been restricted to the organized sector, meaning that a vast majority of the workforce in the unorganized sector has been denied access to formal channels of old age financial support. Only around 12 per cent of the working population in India is covered by some form of retirement benefit scheme, and the remaining are therefore dependent on their earnings and transfer from their children or other family members. These informal systems of old age income support are imperfect and are becoming increasingly strained. Also, the pattern of life expectancy has changed in India over the years. The mortality characteristics of high income group government employees are more or less in line with the OECD population. This gives a lot of opportunities for growth within the pension/life insurance sector in India. As for current pension systems in India, one can find both government and private providers. Government Pension Providers New Pension Scheme (NPS) In 2004, The Government of India, Ministry of Finance, introduced a New Defined Contribution Pension Scheme that would replace the existing System of Defined Benefit Pension. Like most other developing countries, India does not have a universal social security system to protect the elderly against economic deprivation. As a first step towards instituting pension reforms, Government of India moved from a defined benefit pension to a defined contribution based pension system. The New Pension Scheme came into operation and is available to all citizens of India on a voluntary basis and mandatory for all employees of the Central Government (except from the ministries of railways and defence, which are governed by their respective pension rules) appointed on or after All Indian citizens between the age of 18 and 60 can join the NPS. The New Pension Scheme will work on defined contribution basis and will have two tiers Tier I and Tier II. Tier-I is mandatory for all Government servants joining Government service on or after In Tier I, Government servants will have to The Trade Council, Embassy of Denmark, India Page 3 of 10

4 make a contribution of 10 per cent of his Basic Pay, DP and DA which will be deducted from his salary bill every month. The Government will make an equal matching contribution. Tier I contribution will be kept in a nonwithdrawal Pension Tier I account. Tier II: In addition to the above pension account, each individual can have a voluntary Tier II withdrawable account at his option. The government will make no contribution into this account. These assets would be managed in the same manner as the pension. Note that, an active Tier I account will be required to open a Tier II account. Furthermore, you can transfer the savings amount from tier 2 account to tier 1 account at any time (but this is not reversible). Previous provisions of Defined Benefit Pension and GPF 1 is not available to Government servants joining Government service on or after An independent Pension Fund Regulatory and Development Authority (PFRDA) regulate and develop the pension under the NPS. PFRDA has appointed professional Pension Fund Managers (PFMs) to manage and invest the pension contributions under the NPS. Presently subscribers can choose from the following PFMs. LIC Pension Fund Limited, SBI Pension Funds Pvt. Limited, UTI Retirement Solutions Limited, IDFC Pension Fund Management Co. Limited, ICICI Prudential Pension Funds Management Co. Limited, Kotak Mahindra Pension Fund Limited, Reliance Capital Pension Fund Limited, Central Record Keeping Agency (CRA): CRA maintains records of all contributions and transaction details of subscribers. Besides, facilitating implementation of individual choice, the CRA is also expected to help in a big way in reducing fees and costs because every fund manager will not be 1 GPF = Government Pension Fund (The Government Pension Fund (GPF) was established under the Government Pension Fund Act. The objectives are to ensure member benefits upon retirement, to encourage member saving consciousness, as well as to provide members with other welfare and benefits. For the sole benefits of members, GPF invests in compliance with ministerial regulations. GPF has two categories of members; contributing and non-contributing. Members who joined the civil service after March 27, 1997 must be contributing members. Those who served the government earlier had the rights to choose to be either contributing or non-contributing members). The Trade Council, Embassy of Denmark, India Page 4 of 10

5 required to set up an elaborate fund collection, transfer, record keeping and marketing infrastructure. NPS is designed to leverage the existing network of bank branches and post offices to collect contributions and ensure that there is seamless transfer of accumulations in case of change of employment and/or location of the subscriber. This network consists of authorized Points of presence (POPs), where it is possible to open a Permanent Retirement Account (PRA) with the Central record Keeping Agency (CRA). Employees' Provident Fund Organisation (EPFO) The Employees' Provident Fund Organisation (EPFO) is a statutory body of the Government of India under the Ministry of Labour and Employment. It administers a compulsory contributory Provident fund, pension and an insurance scheme for the Indian private workforce. It is one of the largest social security organisations in the world in terms of members and volume of financial transactions undertaken. All defined establishments employing more than 20 workers are part of this scheme covering about 40 million employees in the organized sector. EPFO vs. NPS Employees in the organised sector, who are covered by the Employees Provident Fund, are likely to be allowed to opt for the new pension scheme (NPS). However, they will have to simultaneously subscribe to the EPF scheme. Employees under the existing EPF will not be allowed to withdraw from it. However, in case they wish to opt for the NPS, they will have to do it in addition to the EPF scheme, says D. Swarup, chairman of PFRDA. It is understood that the NPS will provide flexibility to its subscribers. Unlike the EPF scheme, where the contribution towards the EPF scheme is on a monthly basis, subscribers under the NPS would have the option of making their contribution either monthly or quarterly. Public Provident Fund This is also a defined contribution scheme. The Government is managing this scheme. A fixed rate of return is offered under the scheme. In addition, tax benefits are being offered for making investment in the Public Provident Fund account. Coverage under the Public Provident Fund is about 3.5 million. The Trade Council, Embassy of Denmark, India Page 5 of 10

6 Private Pension Providers They provide voluntary pension schemes for general public but cover a very small segment of the total population. The total coverage under these pension schemes is about 1.6 million. Life Insurance Corporation of India (LIC), LIC operates within the Life Insurance sector, and offers Insurance Plans, Pension Plans, Unit Plans, Special Plans, and Group Schemes to its clients. Being the first insurance company in India, LIC started its operations in To see the different Pension Plans of LIC, go to: SBI Life Insurance, SBI Life Insurance is a joint venture between State Bank of India and BNP Paribas Assurance. SBI owns 74 per cent of the total capital and BNP Paribas Assurance the remaining 26 per cent. SBI offers Individual Plans (hereunder Pension Plans), Group Plans, and Health Plans. To see the different Pension Plans of SBI, go to: UTI Retirement Solutions Limited, UTI Retirement Solutions Ltd. (UTI RSL), a 100 per cent subsidiary of UTI Asset Management Company Ltd. was incorporated on 14 th December, UTI RSL was set up to carry out the operations as Pension Fund as directed by the Board of Trustees of the New Pension System Trust. UTI RSL was initially appointed by PFRDA to manage Pension Funds of Government Employees. However, on 13 March 2009, the company also received the letter of appointment for Management of Pension Funds under the New Pension System for all citizens, other than Government Employees covered by NPS. IDFC Pension Fund Management Co. Limited, IDFC Pension Fund Management Company Limited (IDFC PFM) was set-up in April 2009 as a joint Venture between Infrastructure Development Finance Company Ltd. (IDFC) and IDFC Asset Management Company Private Ltd (IDFC AMC) to engage in the business of Pension Fund Management acting as advisors and fund managers. The Trade Council, Embassy of Denmark, India Page 6 of 10

7 IDFC Pension Fund Management is one of the Pension Fund Managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA) to manage retirement funds under the New Pension Scheme (NPS) open to individuals in the private sector. Kotak Life Insurance, Kotak Mahindra Old Mutual Life Insurance Ltd is a joint venture between Kotak Mahindra Bank Ltd., its affiliates and Old Mutual. A company that combines its international strengths and local advantages to offer its customers a wide range of innovative life insurance products, helping them in taking important financial decisions at every stage in life and stay financially independent. The company is one of the fastest growing insurance companies in India and has shown remarkable growth since its inception in Kotak L.I. offers Life Insurance Plans for both groups, and individuals, hereunder retirement plans. To see Kotak L. I. s retirement plans, go to: Reliance Life Insurance, Reliance Life Insurance is an associate company of Reliance Capital Ltd., a part of Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of India s leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary investments, private equity and other activities in financial services. Reliance - Anil Dhirubhai Ambani Group also has presence in Communications, Energy, Natural Resources, Media, Entertainment, Healthcare and Infrastructure. Reliance Life Insurance offers products for both groups and individuals, hereunder Retirement Plans. To see the different Retirement Plans, go to: ans/retirement_plan.aspx Recommendations and opportunities for Danish companies Nearly 64 per cent of total Indian population (1.1 billion) forms the working population of the country. The existing pension system leaves more than 88 percent of the total Indian workforce uncovered. Improvements in healthcare The Trade Council, Embassy of Denmark, India Page 7 of 10

8 facilities have led to increase in life expectancy thus compounding the problem of old-age income security. As per the demographic dynamics, the population over 60 years of age will approach 200 million in According to the group of experts appointed by the Government of India, the pension market would grow to about INR 4064 billion (US$ 85 billion) by As far as the Foreign Direct Investment policy is concerned, Non Banking Financial Companies in Asset Management, Investment Advisory, Financial Consultancy and others are allowed 100 per cent FDI under automatic route, subject to minimum capitalization norms as prescribed by the Indian Government. FDI in Insurance sector is capped at 26 per cent subject to licensing by Insurance Regulatory and Development Authority. More detailed information can be seen on This provides a huge opportunity for the Danish companies to enter this vastly untapped market. Many Danish service providers are leaders in providing pension solutions in Scandinavia and other parts of Europe. The advanced IT systems and technology used by the Danish companies can come in handy for the Indian record agencies and pension providers to track the workforce hitherto uncovered in the pension schemes. Innovative schemes used by the Danish companies (pioneers in social security networks) can be utilized in India by modifying and making them suitable for the Indian market. The Trade Council, Embassy of Denmark, India Page 8 of 10

9 Contact Trade Council in India Embassy of Denmark 11, Golf Links INDIA Anshul Jain Deputy Head - Trade Sector Expert: Architecture/Infrastructure/Water/Defence ansjai@um.dk Tel: The Trade Council, Embassy of Denmark, India Page 9 of 10

10 The Trade Council is a part of the Ministry of Foreign Affairs and is the official export and investment promotion agency of Denmark. The Trade Council benefits from around ninety Danish Embassies, Consulates General and Trade Commissions abroad. The Trade Council advises and assists Danish companies in their export activities and internationalization process according to the vision: Creating Value All the Way. The work in the Trade Council follows specific procedures and quality guidelines. In this way our customers are secured the best possible quality under the varying working and market conditions at any given point of time. Ministry of Foreign Affairs of Denmark The Trade Council, Embassy of Denmark, India 11, Golf Links, Phone no: (91) Fax: (91) delamb@um.dk