State of micro pensions in india


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State of micro pensions in india

  1. 1. INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH CENTER FOR INSURANCE AND RISK MANAGEMENTState of Micro-Pensions in India Aashim Joy Consultant Center for Insurance and Risk Management 8th of August 2009 1
  2. 2. The nature of informal sector work requires new strategies and scheme design to deal with transaction costs, high discount rates and the lack of a reference wage.The remarkable diversity of India, a population of approximately 1.17 billion people (estimatefor July, 2009), of which 5.3% are over the age of 65, lower fertility rate, an increasing lifeexpectancy and a greater proportion of the aged in the population, is mounting the mandate of,income savings for financially dependent years. This demographic transition will result in theshare of the elderly (above 65 yrs), to rise significantly to an expected 9% of the population by2030. In absolute terms, the number of those above the age of 60 will rise from 87.5 million in2005 to 100.8 million in 2010. By 2030 this number is projected to be around 200 million, whichwill increase further to 330 million by 2050 1. There are 397 million people in the workforce ofwhich only 28 million are in the organized sector 2. These figures outline the fact that therewould be a massive population who will be in the less productive age in the near future.While the Government of India is giving grants and subsidies for making substantial co-contributions to the Defined Benefit schemes (which has recently been discontinued), for theorganized sector and providing subsidies and grants for the unorganized sector and householdsliving below the poverty line 3. The total pension outlay for all the government departmentshave been growing at an average of 2.5% for the past decade and is projected to stand at Rs.1295 Crore (USD 270.15 Million) in 2009-20104. The expenditure on family welfare, centralsector health and Indian medication sums up to almost Rs. 22179.05 Crore (USD 4626.43Million) for 2008-20095. The Indira Gandhi National Old Age Pension Scheme (IGNOAPS) iscosting the central government Rs. 3,772 Crore and an equal amount to the State and Unionterritory government 6. Thus the burden on the government, for such support and assistanceprovided, is getting unsustainable with time. Also, the government is making way higher1 Asher, Mukul G. ‘Time to Mainstream Micro-Pensions in India’2 Minister of Labour, Government of India ‘ The Indian Government uses a Below Poverty Line, which is a nutritional index based on a requirement of 2,400kilo calories/day and 2,100 kilo calories/day for rural and urban areas respectively.4 Pension Report, Ministry of Finance, Government of India5 Ministry of Health and Family Welfare, and Planning Commission, Government of India6 Press Information Bureau, Government of India ‘’ 2
  3. 3. allocations for pension schemes than when compared with those made for low incomehouseholds.Therefore, with this clear assumption, the Government in order to encourage the households inthe unorganized sector to save up for the financially dependent years, plans to create: Financial infrastructure like Banks, full form (NBFCs), pension funds and the similar to provide reliability and mobility of deposits and easy accessibility platforms. Ease in top-ups and security of identity with low cash transfer costs. Ensure high security and guarantee to the savings to encourage contribution.The government is building up on policy and regulation to develop and guard the pension andmicro-pension market in the country. The Pension Fund Regulatory and Development Authority(PFRDA) was established by theGovernment of India on the 23rd August NPS is mandatory for Government servants who2003 to regulate and develop the join post 1st of Jan’09. Voluntary for the rest of the country.pension sector. The New Pension Open for all aged between 18-55yrs.Scheme (NPS) was introduced in 2004 Minimum deposit of Rs. 6000 an the Government of India, Ministry of Maturity at 60 yrs of age.Finance, Department of Expenditure At maturity, 60% of fund value given as lumpwith the Pension Fund Regulatory and sum and the rest 40% is used to buy an annuity7.Development Authority to be theprudential regulator.Apart from this scheme which mainly targets the organized sector, the government has beenco-contributing and initiating pension plans for the unorganized and rural sectors. Some of theplans are:Rajasthan Vishwakarma Contributory Pension Scheme: The State Government of Rajasthanlaunched the Vishwakarma Contributory Pension Scheme in collaboration with the Invest IndiaMicro-Pension Services Limited from 1st September 2007 in which the maximum contribution ofthe State Government will be Rs. 1000 per member, and an equal contribution from themember will be sought. The scheme matures when the member attains 60 years of age. Thescheme targets the unorganized sector, labourers such as rickshaw puller, cobbler, taxi driver,and domestic servants. The pension fund is being managed by UTI AMC 8and the investments7 Pension Regulatory and Development Authority, 3
  4. 4. are regulated in terms of 60% has to be invested in debt and only to a maximum of 40% inequity. There is an exit load if the member wants to leave the policy before maturity whichvaries between 1-6.5%9.Abhaya Hastham Indira Kranthi Patham Co-Contributory Insurance and Pension Scheme: The"Abhaya Hastham" IKP (Indira Kranthi Patham) co-contributory insurance and pension scheme,primarily acts as a social insurance program for the women as well as the family by providingsocial protection, against conditions including old age, disability, death and others. The schemeis designed for women in the rural areas who are part of a Self Help Group for at least a year,the minimum contribution is Re 1 from the member and an equal amount from theGovernment. The member can contribute any amount more than Re 1 but the government willonly contribute to a maximum of Re 1. The fund is managed by the Life Insurance Corporation(LIC) and will mature when the member turns 60 years10. Though the monthly pension dependson the number of years of contribution, the government has guaranteed a minimum of Rs. 500per month after for all women members after they attain 60 years of age. This scheme is theworld’s largest co-contributory pension scheme for the poor in the unorganized sector, thegovernment has set its budget to 365 Crore (USD 76.12 Million) and intends to serve 12.5Million women members of various Self Help Groups (SHG). The scheme bundles life andaccident insurance along with the pension product and the SHG delivery channel helps reducethe adverse selection and moral hazard.The Andhra government also provides rider benefits to the existing Indira Gandhi Old AgePension Scheme in many parts of the state in terms of weavers, widows and disabilityinsurance.The long term viability of the above programmes should be interesting to observe since thegovernment is burdened with a huge expense as co-contributions annually. Since micro-pensions is a long term commitment, the poor in the rural area would be skeptical from gettinginto the contract, hence bundling of an insurance product seems like a good tool.Another effort in this space is the Invest India Micro Pension Services (IIMPS11) which wasestablished in 2006 by leading development and pension sector experts to enable low incomeinformal sector workers to build up savings for retirement in a competitive and well regulatedenvironment. IIMPS delivers pension and insurance products and services to low income9 Department of Labour, Government of Rajasthan ‘’10 Department of Rural Development, Government of Andhra Pradesh ‘’11 4
  5. 5. workers in collaboration with micro-finance institutions, cooperatives, self-help groups, workerunions, multilateral and bilateral aid agencies, government departments and finance firms.IIMPS has developed a proprietary model called Micro Pension™ to deliver individual pensionand insurance services to the poor and also link it to the pan-India partnership network. IIMPSis using its technology platform to enable low income workers with modest savings to accesslow cost pension and insurance products. IIMPS is also working with some governmentdepartments in design and implementation of co-contributory pension and insurance schemestargeting the poor. At present IIMPS is partnering with the Government of Rajasthan, Unit Trustof India Asset Management Company Limited (UTI AMC),Invest India Economic Foundation,SEWA Bank, Friends of Women’s World Banking, IIMS Dataworks, BASIX, India DevelopmentFoundation, Prayas, Rajasthan Mahila Kalyan Mandal (RMKM), Aajeevika Bureau, IndianGrameen Service, National Association of Street Vendors of India (NASVI) and NIDAN.At the Center for Insurance and Risk Management, we believe micro-pension is a part of thecomprehensive safety net solution that should be available to low income households. We areattempting to bundle Micro-Life and/or Micro-Health Insurance with the micro-pension productwhich is being offered by IIMPS in collaboration with its various partners.Hypothesis of the project: Distribution cost (largely identity related challenges and involved cost and traffic of cash and data) would dramatically fall when the present IT platform of IIMPS is used The clientele is a comparatively ‘good risk’ group Both these features, could drastically reduce the cost of insurance for the specified group. CIRM, will aim to prove this hypothesis by partnering with IIMPS and pilot a life insurance bundled product for its pension clients in Rajasthan. 5