1) India faces a growing aging population and need for retirement savings as fertility rates decline and lifespans increase. Only 28 million of India's 397 million workforce are in the organized sector with pension plans. 2) The government provides some pension support but the burden is unsustainable. It is encouraging household savings for retirement through programs like the New Pension Scheme and state-level micro-pension plans partnering with organizations like Invest India Micro Pension Services. 3) IIMPS delivers low-cost pension and insurance products to informal workers through partnerships, seeking to reduce distribution costs using IT platforms and provide a bundled product with CIRM's pilot of life insurance for IIMPS pension clients in Rajast

1. INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH
CENTER FOR INSURANCE AND RISK MANAGEMENT
State of Micro-Pensions in India
Aashim Joy
aashim.joy@ifmr.ac.in
Consultant
Center for Insurance and Risk Management
8th of August 2009
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2. The nature of informal sector work requires new strategies and scheme design to deal with
transaction costs, high discount rates and the lack of a reference wage.
The remarkable diversity of India, a population of approximately 1.17 billion people (estimate
for July, 2009), of which 5.3% are over the age of 65, lower fertility rate, an increasing life
expectancy and a greater proportion of the aged in the population, is mounting the mandate of,
income savings for financially dependent years. This demographic transition will result in the
share of the elderly (above 65 yrs), to rise significantly to an expected 9% of the population by
2030. In absolute terms, the number of those above the age of 60 will rise from 87.5 million in
2005 to 100.8 million in 2010. By 2030 this number is projected to be around 200 million, which
will increase further to 330 million by 2050 1. There are 397 million people in the workforce of
which only 28 million are in the organized sector 2. These figures outline the fact that there
would be a massive population who will be in the less productive age in the near future.
While the Government of India is giving grants and subsidies for making substantial co-
contributions to the Defined Benefit schemes (which has recently been discontinued), for the
organized sector and providing subsidies and grants for the unorganized sector and households
living below the poverty line 3. The total pension outlay for all the government departments
have been growing at an average of 2.5% for the past decade and is projected to stand at Rs.
1295 Crore (USD 270.15 Million) in 2009-20104. The expenditure on family welfare, central
sector health and Indian medication sums up to almost Rs. 22179.05 Crore (USD 4626.43
Million) for 2008-20095. The Indira Gandhi National Old Age Pension Scheme (IGNOAPS) is
costing the central government Rs. 3,772 Crore and an equal amount to the State and Union
territory government 6. Thus the burden on the government, for such support and assistance
provided, is getting unsustainable with time. Also, the government is making way higher
1
Asher, Mukul G. ‘Time to Mainstream Micro-Pensions in India’
2
Minister of Labour, Government of India ‘labour.nic.in/.../INFORMALSECTORININDIA-ApproachesforSocialSecurity.pdf
3
The Indian Government uses a Below Poverty Line, which is a nutritional index based on a requirement of 2,400
kilo calories/day and 2,100 kilo calories/day for rural and urban areas respectively.
4
Pension Report, Ministry of Finance, Government of India
5
Ministry of Health and Family Welfare, and Planning Commission, Government of India
6
Press Information Bureau, Government of India ‘http://pib.nic.in/release/release.asp?relid=32803’
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3. allocations for pension schemes than when compared with those made for low income
households.
Therefore, with this clear assumption, the Government in order to encourage the households in
the unorganized sector to save up for the financially dependent years, plans to create:
Financial infrastructure like Banks, full form (NBFCs), pension funds and the similar to
provide reliability and mobility of deposits and easy accessibility platforms.
Ease in top-ups and security of identity with low cash transfer costs.
Ensure high security and guarantee to the savings to encourage contribution.
The government is building up on policy and regulation to develop and guard the pension and
micro-pension market in the country. The Pension Fund Regulatory and Development Authority
(PFRDA) was established by the
Government of India on the 23rd August NPS is mandatory for Government servants who
2003 to regulate and develop the join post 1st of Jan’09.
Voluntary for the rest of the country.
pension sector. The New Pension
Open for all aged between 18-55yrs.
Scheme (NPS) was introduced in 2004
Minimum deposit of Rs. 6000 an year.
by the Government of India, Ministry of Maturity at 60 yrs of age.
Finance, Department of Expenditure At maturity, 60% of fund value given as lump
with the Pension Fund Regulatory and sum and the rest 40% is used to buy an annuity7.
Development Authority to be the
prudential regulator.
Apart from this scheme which mainly targets the organized sector, the government has been
co-contributing and initiating pension plans for the unorganized and rural sectors. Some of the
plans are:
Rajasthan Vishwakarma Contributory Pension Scheme: The State Government of Rajasthan
launched the Vishwakarma Contributory Pension Scheme in collaboration with the Invest India
Micro-Pension Services Limited from 1st September 2007 in which the maximum contribution of
the State Government will be Rs. 1000 per member, and an equal contribution from the
member will be sought. The scheme matures when the member attains 60 years of age. The
scheme targets the unorganized sector, labourers such as rickshaw puller, cobbler, taxi driver,
and domestic servants. The pension fund is being managed by UTI AMC 8and the investments
7
Pension Regulatory and Development Authority, http://pfrda.org.in/indexmain.asp?linkid=84
8
www.utimf.com/about_us/introduction/introduction.aspx
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4. are regulated in terms of 60% has to be invested in debt and only to a maximum of 40% in
equity. There is an exit load if the member wants to leave the policy before maturity which
varies between 1-6.5%9.
Abhaya Hastham Indira Kranthi Patham Co-Contributory Insurance and Pension Scheme: The
"Abhaya Hastham" IKP (Indira Kranthi Patham) co-contributory insurance and pension scheme,
primarily acts as a social insurance program for the women as well as the family by providing
social protection, against conditions including old age, disability, death and others. The scheme
is designed for women in the rural areas who are part of a Self Help Group for at least a year,
the minimum contribution is Re 1 from the member and an equal amount from the
Government. The member can contribute any amount more than Re 1 but the government will
only contribute to a maximum of Re 1. The fund is managed by the Life Insurance Corporation
(LIC) and will mature when the member turns 60 years10. Though the monthly pension depends
on the number of years of contribution, the government has guaranteed a minimum of Rs. 500
per month after for all women members after they attain 60 years of age. This scheme is the
world’s largest co-contributory pension scheme for the poor in the unorganized sector, the
government has set its budget to 365 Crore (USD 76.12 Million) and intends to serve 12.5
Million women members of various Self Help Groups (SHG). The scheme bundles life and
accident insurance along with the pension product and the SHG delivery channel helps reduce
the adverse selection and moral hazard.
The Andhra government also provides rider benefits to the existing Indira Gandhi Old Age
Pension Scheme in many parts of the state in terms of weavers, widows and disability
insurance.
The long term viability of the above programmes should be interesting to observe since the
government is burdened with a huge expense as co-contributions annually. Since micro-
pensions is a long term commitment, the poor in the rural area would be skeptical from getting
into the contract, hence bundling of an insurance product seems like a good tool.
Another effort in this space is the Invest India Micro Pension Services (IIMPS11) which was
established in 2006 by leading development and pension sector experts to enable low income
informal sector workers to build up savings for retirement in a competitive and well regulated
environment. IIMPS delivers pension and insurance products and services to low income
9
Department of Labour, Government of Rajasthan ‘http://rajlabour.nic.in/scheme.htm’
10
Department of Rural Development, Government of Andhra Pradesh ‘http://www.serp.ap.gov.in/AH/index.jsp’
11
www.iimp.in
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5. workers in collaboration with micro-finance institutions, cooperatives, self-help groups, worker
unions, multilateral and bilateral aid agencies, government departments and finance firms.
IIMPS has developed a proprietary model called Micro Pension™ to deliver individual pension
and insurance services to the poor and also link it to the pan-India partnership network. IIMPS
is using its technology platform to enable low income workers with modest savings to access
low cost pension and insurance products. IIMPS is also working with some government
departments in design and implementation of co-contributory pension and insurance schemes
targeting the poor. At present IIMPS is partnering with the Government of Rajasthan, Unit Trust
of India Asset Management Company Limited (UTI AMC),Invest India Economic Foundation,
SEWA Bank, Friends of Women’s World Banking, IIMS Dataworks, BASIX, India Development
Foundation, Prayas, Rajasthan Mahila Kalyan Mandal (RMKM), Aajeevika Bureau, Indian
Grameen Service, National Association of Street Vendors of India (NASVI) and NIDAN.
At the Center for Insurance and Risk Management, we believe micro-pension is a part of the
comprehensive safety net solution that should be available to low income households. We are
attempting to bundle Micro-Life and/or Micro-Health Insurance with the micro-pension product
which is being offered by IIMPS in collaboration with its various partners.
Hypothesis of the project:
Distribution cost (largely identity related challenges and involved cost and traffic of
cash and data) would dramatically fall when the present IT platform of IIMPS is used
The clientele is a comparatively ‘good risk’ group
Both these features, could drastically reduce the cost of insurance for the specified group.
CIRM, will aim to prove this hypothesis by partnering with IIMPS and pilot a life insurance
bundled product for its pension clients in Rajasthan.
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