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English Release 30-January 2015
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Previous Date

Ministry of Finance22-January, 2007 16:11 IST
FM's statement at Chief Ministers' Conference on Pension Reforms

   Following is the text of the speech delivered by the Finance Minister, Shri P. Chidambaram while inaugurating the Chief Ministers' Conference on Pension Reforms, here today:-


"On behalf of the Government of India, it is my privilege to welcome you to this conference.

            The number of persons employed in the organized sector in India is about 50 million. The number of persons employed in the unorganized sector – and this includes casual and temporary employment – is estimated at 310 million. Of this large workforce, only about 11 per cent, including Government employees, is covered under any kind of pension plan.

            It is estimated that one-eighth of the world’s elderly population lives in India. The number of persons over 60 years of age today is 90 million and this number is expected to rise to 175 million by the year 2030.

            The question that faces every country, especially ageing societies, is how can the elderly be provided for in the last years of their lives? The answer is a reasonable and affordable package of retirement benefits that includes pension and health care.

            Hitherto, save in a few cases in the private sector, pension has been given on a ‘pay as you go’ (PAYG) basis. For example, Government servants have been on the PAYG system. Concerns were raised about the sustainability of the PAYG system. The total expenditure of the Central Government on pension payments to its retired employees (including telecom) has gone up from Rs.3,272 crore in 1990-91 to Rs. 28,963 crore in 2005-06 (RE). As a percentage of net tax revenue the total pension outgo has increased from 7.6% in 1990-91 to 10.56% in 2005-06 (RE). The compound annual growth rate (CAGR) of the pension outgo of the Central Government was 17% during this period. 

            Chief Ministers and Finance Ministers of State Governments are aware that pension payments of their Governments have also risen sharply during the last 15 years. The combined pension expenditure of all States has risen from   Rs. 3,131 crore in 1990-91 to Rs. 41,660 crore in 2005-06 (BE). While pension expenditure of States as a percentage of tax receipts was 7% in 1990-91, this proportion rose to 14% in 2005-06 (BE). The CAGR of the pension expenditure of all State Governments taken together was 21% during this period.

            Assuming a continuation of the trend, projections indicate that pension expenditure of the Centre could reach Rs. 35,020 crore by 2009-10. For the States, the projected figure is as high as Rs. 65,081 crore by that year.

            An important study on social security was done under Project Old Age Social and Income Security (Project OASIS) of the Ministry of Social Justice and Empowerment. Other studies were done by a working group constituted by the Ministry of Finance and a high level expert group headed by Shri B.K. Bhattacharya. All studies pointed to the need to switch over from a defined benefit pension scheme to a defined contribution pension scheme. Beginning 2001-02, the Government of India outlined a number of initiatives towards reform of the pension system.

            An unique advantage that India enjoys today is that it has a relatively young working population. Around 220 million persons employed are below 40 years of age. Thus, a large majority of India’s workforce, that is in the age group of 20 to 40 years, has the opportunity – and the capacity – to save for their retirement. The moment must be seized. We have, today, the opportunity to create a pension system that will accumulate the savings of the working population in order to build up sufficient financial wealth to provide a reasonable income, in the form of pension, during their years of retirement. The demographic advantage that India enjoys today will weaken over the next 15 years, and will be lost when the size of the dependent population (children and the elderly) exceeds the size of the working age population.

            Thus, pension reforms in India have been driven by considerations of both the inadequacy and limited coverage of pension provisions for the workforce and the fiscal unsustainability of the PAYG system. The objective is to offer a new pension system to all Indians – employed in the organized and unorganized sectors – that will allow each working person to save during his working years and to receive a reasonable income during his years of retirement.

            As a first step, a New Pension System (NPS) was introduced for new entrants to services in Central Government, except the Armed Forces. This was a fundamental shift from the earlier defined benefit pension to a defined contribution pension. However, this System applies to only one category of the Indian workforce. The larger goal is to offer the same defined contribution pension system to all persons in the workforce. This system alone will provide a measure of security to the millions of unorganised workers in the country who, today, do not have any means to save for their retirement.

I greatly appreciate the initiative taken by 17 State Governments to introduce the defined contribution pension system for their new employees. I am also happy to note that some other State Governments have taken proactive steps to put in place arrangements for implementing the new system.  However, I am aware that there are many unresolved issues relating to implementation of the defined contribution pension system on which you are awaiting guidance from the Central Government.

                   As you are aware, we have introduced the Pension Fund Regulatory and Development Authority Bill, 2005 in Parliament. The objective is to give the NPS a statutory basis and to put in place a regulator with statutory powers. The Standing Committee on Finance has examined the Bill with great care and has concluded: 

the Committee, having considered the diverse views expressed and the clarifications given by the Ministry of Finance, are of the opinion that the reform process in the pension sector involving the  setting up of the PFRDA as a statutory regulatory body for managing the NPS is an urgent necessity mainly on account of burgeoning fiscal stress of pension payments on the Central and State revenues and the need to provide a viable alternative to the populace at large to save for old age income security”(emphasis supplied)

            The Committee recommended the Bill to Parliament subject to certain modifications/amendments suggested by the Committee.


Taking into account the report and the recommendations of the Committee, the Central Government has proposed that the Bill, with amendments, may be passed into a law with the following essential features:

(i)         where the Government is the employer, the Government shall make a contribution to match the contribution of the employee (Government servant);         

(ii)         any individual may join the New Pension System;

(iii)        the accumulations, through contributions, will be invested in accordance with the provisions of the Act and the regulations made by the PFRDA;

(iv)        the regulations should be made keeping in mind both security and return. These twin objectives can be addressed only through a diversified portfolio of instruments;

(v)         the individual subscriber  should be given the choice of choosing his portfolio of investments based upon his risk threshold and appetite;

(vi)        Government should distance itself from the management of the funds and leave it to professional bodies, both in the public sector and the private sector, subject to the regulatory jurisdiction of the PFRDA.

            The PFRDA has already done considerable preparatory work towards an architecture for administering the NPS including the appointment of a central record keeping agency for Central Government employees covered under the NPS. The goal is to make that architecture available to State Governments too. Given the nature of the NPS architecture, it may not be economically viable for individual States to establish separate regulators, record keeping agencies and pension fund managers as there would not be sufficient economies of scale and scope. In the interests of a harmonized system, it is necessary and desirable that the functions of regulation, record keeping, accounting and management of funds are done in accordance with national guidelines. I look forward to your suggestions and views in this regard.

            The NPS has been in place for over three years now and pension accumulations continue to go into the public account at a fixed rate of interest, instead of being invested. State Governments are following the same route. However, this is not what was envisaged under the NPS. We have to evolve a consensus on how the accumulated funds would be invested and how they will be managed during the period of accumulation and, subsequently, during the period of pension payment. Further, pending the passage of the Bill, it is necessary to adopt an interim model for investment of the accumulated subscriptions (both at the Central and State levels). Hence, it is proposed that the investment guidelines applicable to non-government provident funds may be adopted as the interim model.

            In conclusion, may I say that most countries of the world – especially the developed countries – are struggling to keep their pension systems afloat. They do not have the demographic advantage that India has; they are on the other side of the demographic curve. Their transition to a defined contribution pension system faces enormous difficulties. In India, we still have the opportunity to put in place a defined contribution pension system. As I said earlier, the moment must be seized. The NPS is an "urgent necessity".

            I have spoken at some length because of the importance of the subject. I invite all of you to share your experiences and thoughts on this major reform measure. I now request the Prime Minister to kindly deliver his address to this distinguished gathering."



(Release ID :24241)

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