Pension reforms to enlarge market size

New Delhi, Apr 8: The reform of the pension system in India will help enlarge the market size to a whopping Rs 4,06,400 crore by 2025 from Rs 56,100 crore in 2002.

''The overall economic gains would be substantial as the mobilisation of assets would lead to effective investments in the stock, bond and mortgage markets, thus supplying the capital to finance corporate growth, government infrastructure and to finance housing through market choice,'' a FICCI-KPMG paper on pension reforms in India says.

The paper notes that the need for reform arises from the various challenges and concerns with respect to the existing pension provisions in India which primarily include skewed coverage, diversity in terms of income and employment of the working population, income generated through existing programmes being inadequate for many retirees and inflation and large and fast growing informal sector which is not covered under any formal or mandatory pension schemes.

''Since the capital market and pension sector are closely related, it will become necessary to undertake capital market reforms along with pension reforms,'' FICCI President Habil Khorakiwala said.

Reforms in the pension sector will inflate the capital markets and thus will require advanced management techniques in the capital markets for managing the extra inflow of funds, the paper stated adding that these would include leveraging technology to provide information to individual pensioners on their asset allocation which will create an interest for individuals and also create accountability on the part of fund managers.

''At present, due to the relatively undeveloped pension sector in India there are few investment avenues for pension funds. A solution to this could be to invest a part of the pension funds in the international markets. This is also a means for portfolio risk diversification and earning higher returns.'' The paper points out that any new system would hinge on a few key parameters for its efficient functioning. For a pension system to be sustainable, the regulator will have to play more of a developmental role wherein they would enforce present regulations and enact new ones if necessary. It would also require a strong regulatory framework for the legal, financial and administrative matters.

The success of the pension reform would depend on the ability of the regulator to operationalise the system around the three corner stones of operational processes, product and distribution, the paper said.

UNI