Politics Slows Down Retirement Reforms

Reforms on the retirement front have been derailed as the finance and the labour ministries continue to be at loggerheads on how best to implement the proposed pension reforms.

While the labour ministry is pushing for implementation on a limited scale among affinity groups, the finance ministry is pressing for nationwide implementation at the earliest. In the process, the country continues to languish, and has already missed the deadline set by Yashwant Sinha, the then finance minister, in his budgetary address.

In his budget speech for fiscal 2003, Sinha had stated that a new pension scheme would be announced and implemented by June 21 this year.

 

However, no move towards the introduction of the same have taken off and even a pension regulator is yet to be decided. Interestingly, this is not a scenario exclusive to India alone. Worldwide, politics have slowed down retirement reforms.

Global financial services companies saw a drop in management of retirement assets by three per cent from calendar year 2000 to $11.9 trillion in 2001.

Reformers throughout the world are promoting defined-contribution retirement savings programs that could dramatically increase the amount of retirement assets flowing into privately managed funds. But, according to a new global retirement market report from Cerulli Associates Inc, Boston, local politics are slowing down reform efforts.

Government officials in the United Kingdom are worrying about whether the new defined contribution programmes -- money purchase schemes -- can really make up for the loss of the old defined-benefit -- final salary schemes.

Countries belonging to the European Union have just reached an "agreement to agree" on a general plan for developing "pan-European" pension programmes. However, distrust in the ability of 'foreign' (identified to be non-government) authorities to meet the same standards as domestic supervision or the fear of smothering red tape are the key concerns, stated the Cerulli report.

Cerulli Associates look into various segments of the pension industry and come out with an annual report on the global scene.

Worldwide, governments are pressing for pension reforms for two reasons: to ease the burden on the government's finances, and to bring about long term security where no security net exists like in the case of India. The reform process here will initially focus on the self-employed, with 89 per cent of the population not covered under any provident fund.

In a two-day seminar organised by the Insurance Regulatory and Development Authority last week in Hyderabad, the insurance regulator pressed for the need to at least double tax incentives from the present Rs 10,000 per annum, under section 80 CCC of the Income Tax Act.

Today, if an individual were to invest just Rs 10,000 annually for a period of 20 years, by the time he retires, he would get only Rs 4,000 monthly, which, considering the inflation level, would not be much to sustain oneself. The industry is demanding the tax exemption to rise to at least Rs 20,000-25,000 in order that an individual gets a monthly pension of Rs 10,000.

Securities and Exchange Board of India chairman G N Bajpai also pressed for tax benefits to promote pension schemes in the country. He also spoke of how the Indian capital market would be strengthened through investment by pension funds.

Already 102 foreign pension funds/endowment funds are registered with Sebi as foreign institutional investors, and have invested a total of Rs 2,500 crore in the Indian capital market, he pointed out.