The government of India has taken the first step in sound pension reform by enacting the PFRDA Ordinance. The DC (defined contribution, fully-funded system) will allow Indian contributors to accumulate sufficient funds for a dignified retirement, and will reduce the government’s obligations to the outdated old-age security systems which will be severely impacted by the fast-aging population. We expect that the new system will enable many millions of Indian workers, both in the organised and the unorganised sector, to achieve their retirement goals more efficiently by providing efficient, reasonably-priced pension products with wide customer choice of investments.

What kind of funds can be generated in the Indian pension sector in five years?

We estimate that the new system could be expected to generate, conservatively, roughly $10 billion in assets under management by 2010. If the PFRDA also allowed employers to match employee’s contributions on a tax-deferred or tax-exempt basis, these assets could easily double within five years.

What are your suggestions in terms of number of players, capital requirement, foreign stake, products for the Indian pension market?

In terms of participation in the new system, we believe that no limits should be placed on the number of players. Proper solvency and capital requirements should be set by the regulator, but market forces should define the natural number of companies participating - be it asset managers, mutual fund managers, insurance companies or banks. Foreign participation should not be limited to minority status. This is the way most private pension systems operate around the world today, because competition in this market fosters the generation of competitive products, efficient pricing and optimal customer choice.

How does the pension funds market work in US in terms of products, customer’s return and benefits? What are the US pension market lessons for Indian market?

The US pension market has roughly $4 trillion ($4,000 billion) in DC assets, of which two trillion are in 401K DC products with 45 million contributors. The system is employer-driven, is 25 years old, and has returned on average above seven per cent annual returns to contributors. The remaining two trillion are in IRA (Individual Retirement Accounts) a retail product which has similar tax advantages for self-employed individuals. The lessons for the Indian market are simple: employer-based, tax-deferred, defined contribution systems with wide customer investment choice are the optimal ways to create a successful private pension system which will withstand the tests of time, market fluctuation and economic volatility.