Indian Pension Fund Is in Distress: Andy Mukherjee By Andy Mukherjee May 26 (Bloomberg)
[Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.] In another country, financial recklessness of this magnitude would cause public uproar. Not in India, where politicians have duped people into believing that the country's state-owned pension fund isn't in distress even if it must use unclaimed deposits to make payments. That plan to use dormant accounts, reported this month by the Business Standard newspaper, is pathetic, and it's illegal. It's also surprising because India doesn't have Europe or Japan's aging problem. With 60 percent of India's 1 billion people between the ages of 15 to 64, there should be more money coming into the 10-year-old fund than going out. The Provident Fund's woes began in 1995 when then Finance Minister Manmohan Singh, who's now the prime minister, bowed to political pressure and allowed it to offer annuities to retiring workers that were linked to their last 12 months' pay and were partly funded by the government. Not only are Indians increasingly living longer, the interest rate on government bonds and the so-called special deposits, in which a big chunk of the pension savings are parked, has fallen rapidly. The yield on 10-year Indian government debt is now about 7 percent, half what it was a decade ago. The fund is finding it so difficult to meet its pension obligations that someone in the government has come up with this brilliant idea that it must help itself to money which doesn't belong to it. Dipping into inactive returns ``is not allowed by the law,'' and such a step will be ``extremely retrograde,'' says the National Council of Applied Economic research. The Employee Provident Fund Organization has a 190 billion rupee ($4.4 billion) shortfall because of its unviable pension plan, the New Delhi-based research group estimates. `Practically Bankrupt' ``Thanks to the policies of successive governments,'' says NCAER, ``the fund now finds itself practically bankrupt.'' Investors know India won't let the pension fund, which has 1.3 trillion rupees in assets and 40 million contributors, fail. The worst-case scenario is that it will be bailed out by a government whose budget deficit ranks among the highest in the world. Some 9.4 billion rupees lay in unclaimed Provident Fund accounts on March 31, 2004. The official explanation is that workers have changed jobs without bothering to transfer their savings to new accounts. In the absence of a U.S.-style unique Social Security number, it isn't possible for the fund to track down these people. It's indeed a failure on the depositor's part. But it isn't a good enough reason for the fund to stop recognizing the accountholder's claim and give the money to someone else. Revamping Pensions Sooner or later, the desperation that's evident in the proposal was bound to set in. ``A pension system which is based on fiscal subsidies will lack sustainability,'' says Ajay Shah, a consultant to India's finance ministry. ``It may work for 10 million or 20 million workers for a decade or two. But it will not work for 100 million or 200 million workers for the lifespan of a young person entering the labor market at age 20.'' In a recent study, Shah suggested decoupling pension accumulation from payouts. In the accumulation phase, which spans an employee's working life, there shouldn't be any promise of an assured annuity. Workers will simply contribute into professionally managed funds. At retirement, the wealth accumulated in a pension account will be handed over by the fund manager to a life insurance company, which will then convert that wealth into an annuity. Revamp In this kind of an arrangement, the pension fund won't have to take a view ``in 2000 about mortality and interest rates that will prevail in 2040,'' Shah says. India has decided to revamp the pension system by throwing open retirement accounts to non-state fund managers, such as the Principal Financial Group Inc., the biggest U.S. seller of 401(k) retirement-savings plans. However, the government's Marxist allies, who keep Singh in power, are staunchly opposing the legislation that will make private participation possible. ``Separation of pension from insurance,'' says People's Democracy, a publication of the Communist Party of India (Marxist), ``is a cunning ruse to feed the avarice of foreign players to enter the Indian market with 100 per cent equity.'' Private fund managers can offer better returns because they will have greater investment choices. That will ease the pressure on the state-run fund, for which each new account means a bigger loss. Competition Nine of 10 Indian workers have no retirement security. That can only change when a number of pension fund managers compete with each other to enroll workers. Leaving the job any longer to a government bureaucracy will be a dangerous mistake because urbanization is weakening traditional family ties, and India's rapid economic growth will ensure that poverty is increasingly associated with old age. Politicians and labor unions aren't willing to see the bigger picture. According to a trade union backed by India's main Marxist party, all that's needed to nurse the emaciated state- owned pension system back to health is for the government to increase the interest rate on special deposits to 12 percent. Why bother about sustainability, when subsidy will do? To contact the writer of this column:Andy Mukherjee in Singapore at [EMAIL PROTECTED] ------------------------ Yahoo! Groups Sponsor --------------------~--> Has someone you know been affected by illness or disease? 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