Seeking A Pension Oasis.

India and insurers are seeking retirement solutions for a market that could rival China in size.

Nearly a dozen international insurance, mutual fund and pension companies are working on plans to enter the pension market in India, which is being opened to private companies. At present, less than 11% of the 400 million working people in India are covered by some form of pension. The untapped potential makes India one of the largest possible markets in the world, potentially as large as China.

Among the companies interested in the Indian pension market are Allstate Corp., Prudential Insurance Company of America, Prudential Corp. plc of the United Kingdom, New York Life Insurance Co., Aetna Inc., CGU plc, Standard Life Assurance Co., Zurich Financial Services, Sun Life Assurance Co. and Liberty Mutual Insurance Co.

"There has been a significant growth in the private mutual fund industry" said Stuart Purdy, CGU's representative manager for India. "I am sure there is a huge pension market waiting to be tapped in India. We would be interested in managing pension funds for employers as well as selling annuities directly in the market."

Purdy said the growth of the pension business in Poland in recent years was a good example of what market liberalization can do. "We sold 1.5 million annuities in 11/2 years in Poland" he said. "And mind you, we are talking of a country with a population of 40 million."

N.N.Joshi of ING Group said almost all the foreign life insurance companies awaiting licenses from the insurance regulator seem to be interested in tapping the pension market as well. "Then, there will be the banks, mutual funds and specialized pension fund companies trying to enter this market," he said.

Estimates on the exact business potential differ widely, because there is hardly any experience of privately administered pension business. U.R. Bhat, chief investment officer of Jardine Fleming India Asset Management, said the potential pension market is in the range of $11.5 billion to $16 billion after taking into account the fact that household savings is 12% to 13% of the gross domestic product. Basudeb Sen, executive director of Unit Trust of India, the country's largest mutual fund, has put the size of the potential market at $92 billion.

The recent amendment to the Life Insurance Corporation Act divested the state-run life insurer of its monopoly, and that includes its monopoly in the sale of annuities. Pension funds had been required to buy annuities from the Life Insurance Corp. (LIC), but private Indian and foreign companies can now enter the annuity market. A proposed amendment to the Income Tax Act would give those competitors tax relief on investment in annuities-an advantage that currently applies only to products sold by LIC.

A major move by the government was the formation of an expert panel led by SA. Dave, former chairman of Unit Trust of India, to look into the possibilities of reforming and expanding the pension structure to attract private players. Dave submitted what is known as the Project Oasis Report last January, suggesting the adoption of the three-pillar system advocated by the World Bank, with certain modifications. The three-pillar system exists in a limited fashion, but the report suggested further strengthening and expanding its scope.

"The research studies commissioned by Project Oasis suggest that a pension provision for India--considering the huge diversities in income, savings capacity, literacy and variety of employment categories--will necessitate the formation of a multitude of pillars, including the mandatory defined-contribution provisions of Provident Funds, the voluntary funded public provident fund as well as a new contributory pillar (primarily for those not covered by any other formal pension provision)," the report said.

Dave suggested a modest, state-run and tax-financed first pillar with a flat-rate benefit on a means-tested basis. The second pillar would be the mandatory occupational pension arranged by the employer, while the third would be for personal pensions. Most foreign and Indian private companies are interested in both the second and third pillars.

By the Numbers

At another level, the monopoly LIC has come out with the first-ever investigation on the mortality of annuitants involved in its pension plans-- Jeevan Akshaya, an immediate pension plan, and Jeevan Dhara and Jeevan Suraksha, both deferred-pension plans. LIC hasn't been actively selling its pension plans, concentrating instead mostly on its endowment policies. It sold 55,896 annuities and more than 13 million life insurance policies in 1997 and 1998.

The investigation report will form the basis of pension plans that its rivals will offer once the new players come in, because there are no other data. The report shows that life expectancy among annuitants has been rising at a brisk rate, particularly after the age of 60. In some cases, life expectancy among LIC annuitants is higher than the overall life expectancy in Great Britain.

"The investigation, which shows rising life expectancy, is bound to push up the prices of pension products," said A.D. Gupta, president of the Delhi chapter of the Actuarial Society of India.

A significant development that augurs well for the growth of the pension market is the control achieved over inflation in the past year or so. The average rate of inflation dropped to 3% in 1999-2000 from 6% in 1998-99. Inflation used to average 8% to 11%, raising questions about the value of pensions 20 to 30 years later and discouraging people in the middle- and high-income groups from buying annuities. This led to a preference for short-term investments, including bank deposits, but bank interest rates have been sliding over the past two years, and the attraction of short-term investments is expected to wane.

A major factor that will determine whether foreign players wish to enter the Indian pension market is the extent of investments that will be allowed for pension funds in the high-growth equity markets. The government currently doesn't allow equity investments by pension funds because of their highly volatile nature. Project Oasis has suggested that balanced pension funds be allowed to invest as much as 30% in equities and that growth funds be allowed to do so up to 50%. This could include 10% international equity and the rest in domestic equities. Higher levels of investment in equities could provide foreign players the necessary edge over the LIC in terms of assuring high returns to investors.

For Pillar 3, there should be no compulsions in the manner of investments," the Confederation of Indian Industry wrote in a recent study of the Indian pension market. "Competition should ensure that players do not operate inefficiently. This may not hap pen immediately. But at least complete withdrawal of controls for Pillar 3 resources should be the ultimate goal. In U.K. and USA there are no restrictions on investment of pension assets in respect of schemes which resemble Pillar 2 and Pillar 3."

According to the 1991 census, people older than 60 accounted for 6.4%, or 57.6 million, of India's population of 900 million (a figure that now exceeds 1 billion with the next census due in 2001). The census projected that the proportion of people older than 60 would rise to 8.9% of the population by 2016 and 13.3% by 2026. The declining rate of population growth, reduction in childbirths, improved nutrition and health-care facilities are some of the reasons for higher life expectancy, which also will increase the potential pension market.

"India is going to face the same problem as China of having a large population of retired people said Norman Sorensen, president of U.S.-based Principal International, during a recent visit to India.

Three Pillars

The first pillar of retirement savings, as described in the Project Oasis report, is available limited form for 5.4 million poor beneficiaries? who get a monthly pension of 75 rupees (about $1.72) under the National Old Age Pension Scheme introduced in 1996. It's common knowledge that a large-part of the fund is siphoned off before it reaches the beneficiaries and that, in any case, the amount is too small to be of much help.

The main retirement benefit available now is restricted to the Employees Provident Fund (EPF), which covers more than 22 million workers in government and organized industry. The fund is created by both the employee and the employer, each contributing 10% of the basic salary. Until 1995, fund accumulations, along with a guaranteed interest rate of 12%, used to be paid as a lump sum at the time of the employee's retirement. Only a small portion--6.65%--was preserved for a family pension fund to be paid after retirement or to the family upon the death of the employee.

The first major change came in 1995, when a new law set aside one-third of the Employee Provident Fund collections for monthly pension payment after retirement. This is financed on a pay-as-you-go basis and forms the second pillar.

Another program is the public provident fund, which is more like a fixed-deposit account for a period of six years or more. The only difference is that savers get a tax deduction on up to 20% of their investments every year, provided that the total tax relief for a wide range of tax-saving schemes doesn't exceed 60,000 rupees a year.

The Life Insurance Corp., which is due to lose its monopoly status shortly offers two annuity plans called Jeevan Suraksha and Jeevan Dhara. These are funded plans with defined returns or annuities. Pension plans also are offered by the publicly run Unit Trust of India's Retirement Benefit Plan and Kothari Pioneer, which is a mutual fund set up by U.S.-based Pioneer Investment Management and the Kotharis of Mumbai.

Who's in Charge?

The Insurance Regulatory and Development Authority Act, which provided the legal basis for opening up insurance, is silent about the pension business This has caused some surprise and has discouraged a few players. Principal recently said it wouldn't apply for an insurance registration until the guidelines for companies managing pension and annuity business become clear. The company said it wanted to focus on pension, mutual fund and information technology areas in India.

The government might establish an independent pension authority, as suggested by Project Oasis. Another option is to make pension regulation the responsibility of the Insurance Regulatory and Development Authority. Some mutual funds, however, are pressing the government to bring pension regulation within the ambit of the Securities and Exchange Board of India, which controls mutual funds and stock-market players.

"The pension-fund industry needs to discharge higher accounting and fiduciary responsibilities," Dave said. "Thus, we need an independent regulatory authority." He noted that in the United States, the Securities and Exchange Commission doesn't regulate pension funds, which are the responsibility of the Department of Labor. In many other countries, he noted, the ministry of social security regulates pension funds.

The government is expected to continue with the tax relief that is currently available for investment in pensions and mutual funds. This relief is subject to the ceiling of 60,000 rupees from all tax-saving investments. The crucial question is whether the government will allow additional tax relief for investments in pension funds. Project Oasis has suggested that a 10% tax be imposed on withdrawal from pension funds to discourage it. The government hasn't yet expressed its views on this issue but made it clear that it wouldn't implement some of the other suggestions to revamp the EFF scheme.

One aspect of Project Oasis that has drawn scrutiny is the suggestion that the market should initially be restricted to six pension-fund managers, which raises the questions of why six and what would be the criteria in choosing them. "Let us not complicate the life of an ordinary laborer with too many players and too many schemes in the beginning itself," Dave said. "You can always expand the universe later when things shape up."

S.D. Gupta is a New Delhi-based correspondent.