January 22, 2007
New Delhi

PM's address at the CMs Conference on Pension Reforms

"I am happy to be here at this conference on pension related issues. The Finance Minister has given us all the background for convening this conference and the purpose that we hope it will serve. I look forward to hearing the views of the Chief Ministers and Finance Ministers of States on these vital issues.

The Finance Minister has dwelt at length on the fiscal implications of the existing pension system for government employees. The rising pension bills at all levels of government would be increasingly difficult to finance in future, given the other demands that are there on our resources, particularly for enhancing our expenditures on essential social sectors such as health, education and rural development. Even in the states, all of you must be faced with the rising cost of pension liabilities which compete for your limited resources. All of you have large expenditure obligations to meet for ensuring the rapid development of your states. Therefore, we need better management of our pension liabilities so that state finances can be managed in a healthy, sustainable way in future. This is a very important basis for the changes in the pension system.

The other important reason for calling this meeting is that since 2004, the New Pension System is already in place for all freshly recruited Central Government employees and for employees in many state governments. In the last 3 years, the contributions of these new employees have accumulated in the Public Account. These get a fixed annual return of 8% only. The suggestion that is being considered is that, pending a resolution of all issues related to the PFRDA Bill, these accumulated funds may be allowed to be invested in accordance with the investment pattern prescribed for non-government Provident Funds. The pattern permitted for them has been circulated and will fetch a return superior to that given by the government at present without compromising the safety factor.

I would however, like to draw your attention to another equally important dimension of pension reforms, namely, the availability of pension instruments and schemes for the common man at large. India will face huge challenges in future due to the level and speed of ageing of the population. The life expectancy at age 60, which is around 16 years at present, is expected to rise rapidly, requiring longer periods of retirement support for the elderly. This becomes particularly acute for the unorganized sector, which is by far the major employer of our labour force. This large labour force functions without any options for their old age. At present, only 11% of the workforce is covered under some form of pension schemes. Within the organized sector, the coverage is accounted for largely by government employees. Therefore, workers in the unorganized sector, constituting 90% of the workforce, need a comprehensive pension system which they can subscribe to.

Government of India has a number of schemes to address problems of deprivation when people are of working age. Our Government has launched a National Rural Employment Guarantee Programme (NREGP) which we have implemented initially in 200 districts and plan to expand to cover all districts. The NREGP aims to provide a social safety net by guaranteeing employment in rural areas. This social safety net is available as long as the worker is in the productive age group.

There are other programmes and policies that have elements of the social safety net such as the Targeted Public Distribution System, the Indira Awaas Yojana, the National Rural Health Mission and various types of crop and livestock insurance. We do not, however, yet have a comprehensive social safety net focusing on old age income security covering the bulk of our population.

One major objective of the PFRDA Bill is to put in place the architecture and the delivery mechanism for pension schemes of these kinds. It is my belief that there is a lot to be gained by moving forward and allowing a multiplicity of pension products delivered by a variety of agencies to be offered to our people.

India is on the cusp of its demographic evolution and will miss out on a wonderful opportunity to put in place the social safety nets which an ageing population will soon demand. We should therefore collectively address this important issue, so that we can grasp this opportunity before it becomes an insurmountable problem."