Mumbai: Since the liberation of the insurance market in India, the government has been considering opening up the pensions market to private players. As a first step, the government has asked the Insurance Regulatory and Development Authority (IRDA) to submit recommendations relating to opening up the pensions market.

Basically, the life insurance business and the pensions business are linked to each other. In the case of life insurance, moneys are available to the family of the deceased on the death of a productive person while in the case of pension, money is available to the person after retirement, when he is no longer productive.

In India, the mortality rates have been declining over the last three decades and it is natural that pension funds are being more sought after of late. The life expectation at birth in the country has risen from 45.6 years in 1971 to more than 62 years today. In fact, the life expectation of the average pensioner is substantially more than this figure and is increasing quite rapidly.

The number of pensioners is also rising quickly. The number of people above 60 years in 2001 is estimated at 71 million, forming about 7 per cent of the total population. By 2016, this number is expected to rise to 113 million, forming nearly 9 per cent of the population. Pensions, therefore, are the most suitable way of sustaining these elderly persons.

Not a small task The problem of providing for this section of the population is enormous. To overcome the problem, the World Bank has suggested a structure that breaks up the pension provisions into three types:

1. Publicly-funded schemes providing modest benefits or social security schemes,
2. Occupational schemes sponsored by employers for the benefit of employees or private mandatory pension programmes, and
3. Additional voluntary contributions to meet retirement needs.

In developed countries, social security schemes are operated by the government on a pay-as-you-go basis. Even though employers and employees may have to contribute to these schemes, basically current employees are contributing to pay the pensioners.

But, with the number of retired persons increasing rapidly as compared to the number of working employees, there is a severe strain on this system. Developed countries are reviewing the assumptions made in providing social security benefits, and are proposing more and more private initiatives to meet the old age requirements.

This entails that the state would provide a basic minimum amount of pension benefits, while the remaining amounts will have to be accumulated by the people themselves during their working life through various occupational or personal pension plans.

In India, the government as well as some employers in the organised sector provide occupational schemes. As far as personal pension schemes are concerned, Life Insurance Corporation of India (LIC), Unit Trust of India (UTI) and banks offer such benefits.

The perils involved The central and state governments are facing serious financial constraints in sustaining their pension schemes. Many industries that have closed shop and some that are facing closure are also unable to meet their pension obligations. It is, therefore, time that more personal pension schemes are introduced in the economy.

Under such schemes, during the time pension contributions are made, a number of agencies may be involved. The employer, be it government or private, may administer the fund. Alternatively, outside agencies such as mutual funds, banks or life insurance companies may administer the fund. Finally, at the time of retirement, a life company becomes involved.

It is also to be remembered that such pension contributions are long-term in nature and these funds are mostly deployed in infrastructure building, which helps the economy grow.

India is considered to be an underinsured country and studies reveal that the LIC has so far been able to tap just 20 per cent of the vast insurance potential of the country. With new players entering the field and with innovative schemes and good asset management, this potential can be fully tapped in the coming years.