Financial Market Implications of India’s Pension Reform
IMF Working Papers, April 1, 2007
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Bibliographic details
- Authors: Hélène Poirson
- Published: April 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451866490.001
Summary
- India's planned pension reform will set up a proper regulatory framework for the pension industry and open up the sector to private fund managers.
- Drawing on international experiences, the paper highlights pre-conditions for the reform to kick-start financial development, including:
- (i) the buildup of critical mass;
- (ii) sufficiently flexible investment guidelines and regulations, including on investments abroad; and
- (iii) concurrent reforms in capital markets.
- Given the limited scale of the planned reform, the key challenge for India is to achieve sufficient critical mass early on.
- Options to address this challenge include:
- granting permission for existing workers to switch to the new system; or
- outsourcing all or part of the reserves of private sector provident funds to the new pension fund managers.
Key findings and implications for financial markets
- Establishing a regulatory framework and opening the sector to private fund managers can stimulate financial market development.
- Critical mass is essential for pension funds to have meaningful impact on markets; without it, expected market development effects may be limited.
- Flexible investment guidelines, including rules on investments abroad, are necessary to allow pension funds to diversify and support market deepening.
- Reforms in capital markets need to occur concurrently to absorb and channel pension fund flows effectively.
Policy recommendations and options
- Focus early attention on achieving sufficient critical mass for the new pension system.
- Consider transitional or complementary measures to build scale, specifically:
- Allow existing workers to switch to the new pension system.
- Outsource all or part of the reserves of private sector provident funds to the new pension fund managers.
- Ensure investment guidelines and regulations are sufficiently flexible to permit diversification, including abroad.
- Undertake concurrent capital market reforms to facilitate effective deployment of pension fund assets.
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