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.
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.
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
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.
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.
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.
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
The Committee recommended the Bill
to Parliament subject to certain modifications/amendments suggested by the
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
(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
(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".
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
(Release ID :24241)