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Pensions reform was high on the agenda at a recent World Bank conference in Goa on India's financial sector. Proposed changes include widening the choice of pension products and allowing pension funds to be managed by mutual fund and asset management firms in order to achieve higher returns. Legislation that will begin the process of deregulating the pensions and insurance markets-by granting statutory status to the Insurance Regulatory Authority (IRA)-is expected to be approved by mid-1998, according to Dr. Rakesh Mohan, director general at the National Council of Applied Economic Research in New Delhi. Once IRA becomes a statutory body, it will be free to set guidelines for the deregulation of the pensions and insurance industries.
PENSION PROVISIONS
India lacks a social security system per se and an estimated 80% of the workforce is not covered by the state's pension provisions, according to Hrushikesh Mangalampalli, senior consultant at Watson Wyatt Worldwide in Bombay. For the remainder of workers, retirement provisions fall into three categories: employees' provident fund schemes (EPFS); gratuity schemes that provide for amounts higher than the statutory minimum and superannuation schemes.
Under the 1995 Employees' Provident Fund and Miscellaneous Provisions Act (EPFMP), all employers with more than 20 employees are required to provide EPFS-compulsory savings schemes regulated by the government. The employer and employee each contribute 12% of gross salary to the EPFS. The EPFS offer a guaranteed return of 12% and tax concessions. Upon retirement, employees either receive a lump sum or fixed monthly payments. The size of the EPFS' investable assets is not publicly available.
According to the Payment of Gratuity Act, 1972, all employees with a minimum of five years' service are entitled to a lump sum gratuity. The act has been amended to provide for...