1. Pensions – Tool for social security
Hemant Contractor
Chairman, PFRDA

2. Social Security
Social security refers to the economic security society offers when people are faced with certain risks. The ILO identifies the following contingencies usually covered by social security :
health care
Income security in cases of
old age
unemployment,
sickness,
work injury,
maternity
loss of a breadwinner

3. Features of Social Security
Mandatory / Non Optional
Government/ employer provided and
provisions of entitlements and enforcements.
Configured through Law
Can be Taxpayer funded or Contribution funded or Employer funded (or combination of these)

4. Principal Social Security laws and Programs in India
ORGANISED SECTOR:
The Employees’ State Insurance Act, 1948
The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952
The Employee’s Compensation Act, 1923
The Maternity Benefit Act, 1961
The Payment of Gratuity Act, 1972
Pension Fund Regulatory and Development Authority Act, 2013
UNORGANISED SECTOR:
National Social Assistance Program
NPS Swavalamban, Atal Pension Yojana

5. Social Security Schemes in India
Fund Source
Examples
Eligibility
Taxpayer Funded
IGNOPS, AABY, IGNDPS, NFBS, RSBY
Means tested/ BPL
Employer (Legislation based)
Maternity Benefit, Gratuity, Employee Compensation
Organised sector
Contributory (Employer + Employee) – under law
EPF, EPS, EDLI
ESIC Schemes
Cess Based
Beedi, cine, non-coal mine worker welfare schemes
Specific segment
Contributory
PMJJSY, PMSBY, APY
Voluntary
States / Local bodies / Ministries
Old age pension, disabled pension, Bunkar Bima
Means tested/specific segments

6. INDIAN PENSION SYSTEM MULTI-PILLAR MODEL
PILLAR 0
PILLAR 1
PILLAR 2
PILLAR 3
Social security Grant
Govt. Sector
employees
Occupational sector
Private sector
Name of schemes
IGNAOPS , State Pension Schemes
Defined Benefit scheme
NPS
Superannuation Trusts
EPFO
PPF
Private pension schemes by MF and Insurance Co
NPS /APY
Coverage
Means tested
CG / CAB – Before
SG/ SAB- before predetermined dates CG
On or after
SG/ SAB- after pre-determined dates
Pvt. corporates
As per the EPFO Act
All Citizens above 18 years of age
Participation
Assured subject to means tested threshold
Mandatory
Voluntary
Contribution
Non Contributory
Contributory – Employee and Govt to the extent of 10% of Basic +DA
Contributory -12% for EPFO
Contributory
Benefits
Guaranteed minimum income subject to maximum grant value
Linked to last drawn salary
Market based
Administered rate
APY – Min. guarantee by the govt.
Funding
Budget financed- Central and state Govts.
Budget financed
Contribution + Returns generated
EPFO/ Govt
NPS- PFRDA
Management/ ownership / governance
Public
Govt/ PFRDA
Trusts
Others- Private
Risk borne by Employee

7. No. of beneficiaries/ subscribers (in lakhs)
Pillar
Schemes covered
No. of beneficiaries/ subscribers (in lakhs)
Expenditure on pension/AUM (Rs. Crore)
National Social Assistance Programme
262.36
5,322 1
Civil Service Pension under Old Defined Benefit Pension Scheme of Central Govt.
73.84 (51.96 pensioners serving)
96,771 2
-NPS (Mandatory Defined Contributory)
-EPFO
-Occupational Schemes– Coal miners, Seamen, Assam Tea Plant etc.
56.19    
19.85
1,88,591  
7,20,017  
24,968.3 3
-NPS (Voluntary, Defined contribution)
- APY
-Superannuation funds, retirement funds/ plans, etc. by insurance companies and mutual funds
56.31  
79.2  
27,186  
3,269
4,00,022
Total
13,64,054
% of working age population , AUM/GDP
13.86 %
8.98% 
Source: PFRDA, EPFO, Budget , IRDAI, CMPFO, ATPPF, SPFO

8. Structural Demographic Transition in India, 1971 onwards
Source: Govt. of India, WB Projections, UN projections, CRISIL-PFRDA, others.

9. Rising Numbers of the Elderly
Age group
1961(%)
2011(%)
2026(%)
2050(%)
< 60
94.4
91.4
87.6 80
>= 60
5.6
8.6
(110 mn)
12.4
(180 mn) 20
(297 mn)

10. Challenges in providing Social Security
Prevalence of Huge Informal Sector
Lack of universal social security systems
Barriers to access financial services
Low financial education

11. Challenges in providing pensions to informal sector
Saving Preferences – Physical Assets – Gold, Real Estate, Land etc., Financial Assets – Banks fixed deposits- most preferred
Financial Literacy and Awareness –
Hard to convince the subscriber to opt for pension due to long term commitment
Cost of reaching out – Budgetary constraints
Persistence – dropout rates can increase unless followed up.
People allocate their income to different goals based on urgency, immediacy and social pressure. Since old-age savings do not full fill these criteria, the uptake and demand for such products are limited.

12. Significant Activities - Pensions
Strategic planning
Design and funding
Distribution and collection
Administration
Benefits
Asset management
Communication to members

13. Risks in DC Pension System
Risk that the assets invested performs badly compared with the market
Investment Risk
Risk that the longevity assumed in annuities may be low
Longevity Risk
Risk of administrative errors, IT errors and failures, natural disasters, fraud, legal risks, outsourcing related risks and management or governance risks
Operational Risk
Risk that the vesting annuity is not inflation-adjusted, thus reducing its efficacy
Inflation Risk

14. Risks in Pension in Payout phase
Lumpsum
reinvestment risk,
Longevity risk.
Programmed
market risk involved
Longevity risk
Annuity
Inflation risk
A hybrid of these methods, or allowing the individual to move from one option to another. Such portability holds some merit as individuals can effectively increase their benefits by joining the best system at any given point.

15. How PFRDA addresses Pension Risks
Adopted an unbundled architecture
Different pension activities are carried out by different entities
Investment Risks – Professional Fund Managers selected through rigorous selection and bidding process
Longevity Risk – annuity component can range from 40% minimum to 100% of retirement corpus. Annuities issued by empanelled Insurance companies
Inflation risk – subscribers are free to choose from annuities offered by Insurance companies
Reinvestment risk – non annuity component can be withdrawn in a phased manner over 10 years

16. Thank You