INDIA - The systematic reform of India's pension system represents the "most ambitious" effort in the South Asian region to date, according to the World Bank.
In a new report “Old-age income support in the twenty-first century”, the bank praised the Indian reform measures, which represent a move from defined benefit to defined contribution.
“Regardless of the speed of the transition, the Indian reform represents a fundamental policy shift in the long run, with a non-contributory, unfunded defined benefit scheme being replaced by a fully funded defined contribution scheme,” the bank said.
“While many details of the design have yet to be spelled out, the reform stands out because it does not retain an unfunded defined benefit scheme in the long run.”
The bank noted as of January 1, 2004, all new federal government employees contribute 10% of their salary to a DC scheme, with a matching contribution from the government as employer.
The mandate applies only to new entrants, however the possibility that those already covered by the old DB scheme may be given the choice to switch across is being discussed.
Several state governments, including Andra Pradesh, Karnataka and Tamil Nadu, have announced they intend to join the new scheme, the report stated.
In addition the report flagged a multi-pillar pension design as the best solution to pension reform, describing the design as more flexible and better able to address risks within pension systems.
The suggested multi-pillar framework should comprise a combination of five basic elements: a non-contributory or “zero pillar”; a first pillar contributory system linked to earnings; a mandatory “second pillar”; a voluntary “third-pillar” and; informal intra-family or inter-generational sources of financial and non-financial support to the elderly.
“For a variety of reasons, a system that incorporates as many of these elements as possible, depending on the preferences of individual countries as well as the level and incidence of transaction costs, can, through diversification, deliver retirement income more effectively and efficiently,” the bank stated.
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