1.

The financial services sector in India is highly fragmented with separate regulators in
place for Banking, Asset Management, Insurance and Pension sectors. Pension plans
are offered in India today by Pension Funds by the name of National Pension Scheme
(NPS), regulated by PFRDA; by life insurance companies, regulated by IRDA, and
also by mutual funds, regulated by SEBI & AMFI.
This leads to over-lapping & confusion and non-standardized pension norms, as
there is no single regulator that can function for the development of the pension
market and take full responsibility for the same.
2. India has approx. 90 million people, who are above the retirement age of 58 years.
People above 58 years of age will reach the 200 million mark by 2030. About 75%80% of the work force is still outside the formal social security network (EPFO,
Family Pension, PPF etc.). This underlines the huge untapped potential in the
pension market in India. The pensions and health insurance are the future of
financial services in India with lot of opportunities to develop further. The genesis
actually lies in old age income security for the Indian pension sector, the landscape
for which is highly fragmented.
3. The main focus of the discussions in the pension round table was on the existing
government-run pension system NPS, currently managed by 7 pension funds
and regulated by PFRDA. The PFRDA bill has been pending in the parliament for
approval for the last 5 years as also the proposal to allow FDI in the pension sector so
that foreign pension funds could tap the huge unrealised potential. The NPS has not
been able to do justice to the untapped potential, and lack of awareness and
creation of demand among the people is still a major issue and cause for concern.
4. NPS is a unique pension plan (in that it allows exposure to equity markets to the
extent of 50%), it has not been managed and regulated well by the government.
Not much effort has been put in to create awareness and market the product
among the Indian public. PFRDA has got limited powers & authority, as it has been
formed by Presidents Order, and not by an Act of the Parliament. There is no specific
differentiation and exclusivity in the features of NPS plan, resulting in failure to
attract people. On top of this, the life insurance companies are offering traditional
participating pension plans, paying 25%-30% commission in the first year to their
agents, who are very successfully able to sell such plans. These plans are regulated by
IRDA, which has formulated different set of norms for the same. There is no
structured commission system in NPS that can help pushing the product to the
masses and make them aware about the same. The panel increasingly felt that all
pension products in the sector need to come within the ambit of a single regulator
in order to ensure uniformity and sustainable development in future. The
government should introduce a commission structure of at least 1% for the NPS
and bear the cost as an incentive to push the product to the masses.

5. Very stringent cost structure for the pension funds to operate within, as
stipulated by PFRDA which makes it very difficult for them to break-even unless
they are able to manage a huge volume of business. PFRDAs main focus currently is
only on achieving cost efficiencies in managing the NPS. On the other hand, life
insurance companies enjoy a much more relaxed cost and commission structure,
thereby able to market & sell their pension plans better. It is not a level-playing field
at all for NPS. A pension fund today needs at least Rs. 4 lac crores of AUM to
break-even and capture 5% of the market share under the current cost structure,
which is next to impossible to attain.
6. The underdeveloped bond market in India and the related dearth of long-term
investment opportunities for pension funds to practice and successfully implement
the techniques of Asset-Liability Management (ALM). The panel felt that unless the
bond market (primarily G-Secs) develops further with a long-term investment and
risk management perspective, the opportunities to invest the pension contributions
by the pension funds shall be limited and shall affect the overall returns generated till
the vesting age. Again, the government has not done much in this regard, and the
pension funds have been left with not many long-term secured investment options.

7.

Another significant problem identified by the panel was the underdeveloped

annuity market in India to support the growth of the pension sector and products.
IRDA has made it compulsory for the life insurance companies to offer fixed
annuities after the vesting age, if they are selling pension plans & products. This is
where the real problem lies from the perspective of a life insurance company.
Managing and providing annuities with fixed returns to pensioners is very difficult,
especially under annuity for life option, as the life insurance company has to bear
the entire investment risk of spread compression. The longer the annuitant lives, the
longer is the liability risk of the annuity provider.
There is even a problem on the demand side, as very little interest has been shown by
retail investors to buy annuities after vesting age. Most of them prefer to withdraw
the entire accumulated funds on the vesting age and look for other investment
avenues for generating retirement income. Creating awareness about annuities is also
a major issue and the panel strongly felt that the government and the regulator need
to step in here and provide support to the insurance companies.

8. Overall, it is imperative to open up the Indian pension market for foreign pension
funds with a minimum FDI of at least 26%, as NPS and the life insurance companies
have not been able to create demand and awareness despite the huge untapped
potential for pension plans. Also the pending PFRDA bill needs to be passed as soon
as possible in the Parliament, paving the way for a single and powerful regulator for
managing and regulating the pension sector in India.