VZCZCXRO5414
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0994/01 1351316
ZNR UUUUU ZZH
R 151316Z MAY 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 6609
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 03 NEW DELHI 000994 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
USDA PASS FAS/OCRA/RADLER/BEAN/FERUS 
EEB/CIP DAS GROSS, FSAEED, MSELINGER 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KBIO, KIPR, KWMN, IN 
SUBJECT: INDIA'S NEW PENSION SCHEME AN IMPORTANT FIRST STEP IN 
PROVIDING MORE UNIVERSAL COVERAGE 
 
REFTEL A) NEW DELHI 2455 (2008) 
       B) NEW DELHI 2972 (2008) 
   C) NEW DELHI 104 
 
¶1.  (SBU) Summary: India's Pension Fund Regulatory and Development 
Authority (PFRDA) opened the "New Pension Scheme" (NPS) to all 
Indians between the ages of 18-55, including private sector 
companies, self-employed professionals and informal sector low wage 
workers, on May 1, 2009.  The NPS had previously only been available 
to government employees.  PFRDA has appointed six fund managers, 
including three from the private sector, and different investment 
options allow a mix of investment in equities, mutual funds, and 
bonds.  Investors can open their accounts at points of presence 
provided by 22 service providers permitted by PFRDA, currently banks 
and financial service firms, but excluding insurance firms. 
Currently, the NPS attracts a tax at maturity, but subscribers could 
see NPS payouts made tax free in the first budget of a new 
government after elections.  Minimum contributions and fixed cost 
charges may limit affordability initially.  However, opening the NPS 
to the informal sector is a critical first step in serving the vast 
number of Indians working with no retirement support system, 
estimated at nearly 400 million.  Indian demographics that are 
currently marked by a young population boost the chances of making 
this a viable long-term support system.  In this at least, India has 
planned ahead and the government has demonstrated the political will 
to enact a much-needed but highly contested reform.  End Summary. 
 
 
GOI Opens NPS To The Unorganized Sector 
------------------------------ 
 
¶2.  (SBU) India's Labor Day, May 1, 2009, marked the opening of a 
pension plan to nearly 400 million Indians not covered by a 
government or employer plan.  On that day, the interim Pension Fund 
Regulatory and Development Authority (PFRDA) rolled out the "defined 
contribution" New Pension Scheme (NPS) to private sector companies, 
self-employed professionals and informal sector workers.  Originally 
envisioned in legislation that was introduced in 2005, the 
government has been steadily implementing the organizational 
architecture of the ambitious scheme since 2006 through 
administrative fiat (see reftels A, B, C).  Since the bill's passage 
remained stuck, Ms. Meena Chaturvedi, Executive Director of the 
PRFDA, told Econoffs on May 6 that the government recently took a 
legal opinion which determined that "saving for old age does not 
require" legislation and that the government could move forward with 
opening the pension plan to the unorganized sector. 
 
¶3.  (U) The NPS is open to "all Indian citizens" (between the ages 
of 18-55) including non-resident Indians (other than the government 
workers who already are a part of the pension schemes), which PFRDA 
estimates is about 370 million out of India's estimated work force 
of 450 million (Note: India's labor force is currently growing by 
about 10 million a year.  End note.)  Subscribers must contribute a 
minimum $122 (Rs 6000) each year or $10 monthly, with no maximum, 
into one of three schemes - predominantly equity, government 
securities and corporate bonds, with varying degrees of risk. 
Equity investment is currently capped at 50 percent of the total 
amount and can be invested only in index-linked funds.  The 
subscriber will have the option to decide how the NPS pension wealth 
is to be invested in three asset class.  If an investor is unable to 
decide the investment mix, the default option, called auto choice 
lifecycle fund, will be applied, which will see the investment mix 
change according to the age of the subscriber.  On attaining the 
retirement age of 60 years, account holders will be required to 
compulsorily withdraw at least 40 per cent of their pension wealth 
and the remaining 60 percent can be withdrawn as a lump sum in a 
phased manner. 
 
Pension Fund Managers to Invest Retirement Funds 
----------------------------------------- 
 
¶4.  (U) The PFRDA in February appointed six fund managers including 
State Bank of India, UTI, IDFC, ICICI Prudential Life Insurance, 
Kotak Mahindra and Reliance Mutual Fund to invest the retirement 
 
NEW DELHI 00000994  002 OF 003 
 
 
funds in different investment options.  This marked the entrance of 
private pension fund managers.  The PFRDA has also stated that 
private firms with foreign direct investment (FDI) up to 26% equity 
are also eligible to participate, in line with FDI caps in the 
insurance sector.  Executive Director Chaturvedi told Emboffs that 
the regulator anticipates adding more fund managers over time.  The 
regulator will publish the net asset value of all the funds every 
year in April, giving subscribers an annual chance to switch among 
funds, based on performance information.  The PFRDA will follow the 
mark to market method to calculate the final return offered by the 
fund managers. 
 
Registration through Points of Presence 
------------------------------------- 
 
¶5.  (U) The points of presence are the "customer interface" as PFRDA 
describes it: the physical site where NPS subscribers can go to sign 
up, make regular deposits, submit changes to their investment 
options or pension fund managers (PFMs).  The points of presence 
(POP) are then responsible for conducting KYC norms, routing the 
information and the funds to the appropriate part of the NPS 
"architecture", for e.g., the subscriber information or changes to 
the central recordkeeping agency or deposits to the trustee bank. 
The POPs do not create or sell their own products or services; they 
simply are transmittal points within the architecture.  There are 
currently 22 approved POPs, which are all banks or financial service 
firms.  Most of the POPs are state-owned banks, but the list also 
includes Citibank as well as private Indian banks ICICI and Axis. 
Initially, PoPs are offering NPS at a limited number of branches. 
However, in the next three months, they are expected to expand to 
6000 branches.  Savings would then be routed to a Central 
Recordkeeping Agency, and thereafter managed by the Fund Managers 
who will charge a very low fee of just 0.009% per year. 
 
¶6.  (SBU) Chaturvedi told Emboffs that Indian Post is not/not 
currently a POP.  PFRDA invited it to apply to become one, but the 
process of becoming a POP is a voluntary application process and 
Indian Post declined to apply.  She thinks it may be because of the 
requirement for a certain level of computerization to handle all the 
data transmittal.  She indicated that PFRDA had signaled to Indian 
Post that it could receive some relaxation on the computerization or 
capital reserves requirement that PFRDA makes of POPs.  Press has 
also reported that the insurance regulator, IRDA, has denied 
permission to insurance companies to become POPs upon the invitation 
of the PFRDA, unless they set up 100% subsidiaries for the purpose. 
Reportedly, the IRDA is concerned that insurance funds might be 
mis-channeled into the pension contributions. 
 
Tax Treatment of NPS 
------------ 
 
¶7.  (U) Currently, the NPS provisions follow the EET 
(exempt-exempt-taxable) system, which means that while contributions 
and returns to the NPS are exempt, withdrawals attract tax.  The 
PFRDA has argued to the Finance Ministry that the NPS should enjoy a 
level playing field in terms of tax equality with other financial 
instruments, such as the Public Provident Fund and the Employees 
Provident Fund, which enjoy EEE (exempt-exempt-exempt tax free at 
all stages) status.  Chaturvedi noted that the tax liability could 
only be changed through the budget and was hopeful that the Budget 
2009-10 (expected to be announced in July 2009) would give NPS 
contributions the maximum EEE tax benefits. 
 
A Few Initial Problems 
---------------------- 
 
¶8.  (SBU) Critics note that the transaction costs under the NPS are 
the same for all income groups (i.e. an initial annual fee of $7, a 
levy of 10 rupees (20 cents) per transaction by the Central 
Recordkeeping Agency and a charge of 20 rupees (40 cents) per 
transaction from the point of presence), which disproportionately 
hit lower-income subscribers.  In addition, the program requires an 
annual minimum contribution of Rs 6000 ($122), which also may limit 
membership.  Chaturvedi conceded that, initially, PFRDA expects the 
 
NEW DELHI 00000994  003 OF 003 
 
 
scheme to be most feasible for self-employed workers like 
shopkeepers or semi-skilled artisans like tailors, rather than 
lower-skilled day laborers, who often earn just Rs 100 a day.  She 
also speculated that the government may have to subsidize the cost 
for the very poorest subscribers. 
 
Legislation Still Important 
--------------------------- 
 
¶9.  (SBU) Chaturvedi also told Emboffs that, while the government 
had been able to implement almost all of the pension reform 
envisaged in the stalled PFRDA legislation, PFRDA and the government 
still felt passage of the bill was important.  First, it would 
provide statutory authority to the PFRDA as a regulator (Note: most 
of the PFRDA's work to date had been in its development role.  End 
note.)  In addition, the pension regulatory authority looked to the 
legislation to authorize the PFRDA to oversee existing, private 
pension plans currently offered and managed by a few insurance 
companies. 
 
Comment 
------- 
 
¶10.  (SBU) Creating the system architecture for handling 30 million 
current government pensions and opening the system to India's nearly 
400-million strong uncovered informal workers is a significant 
reform achievement for the UPA government, especially given the 
opposition from the Left.  In addition to providing critical old-age 
support, the expansion of the pension sector and the liberalization 
of investment options also will help deepen India's capital markets. 
 This growing pension sector will bring more institutional investors 
into the stock markets, mutual funds, corporate bonds, and from the 
perspective of the government, a critical market for government 
securities.  Even with its teething problems, the NPS now holds out 
the first-ever possibility of old age income support to several 
hundred million Indians, whose earlier choice was more starkly 
between never stopping work or being dependent on grown children. 
 
 
BURLEIGH