On January 1, 2005, India established the Pension Fund Regulatory and Development Authority (PFRDA). Its primary function will be to oversee the creation of India’s new pension system (NPS). The NPS will give private companies the responsibility to compete for and manage pension accounts. India’s current pension scheme, the Public Provident Fund (PPF), is managed by the government. Although the NPS will be optional for both public and private employees, the Indian government hopes that a smooth transition will eliminate the need to continue with the PPF.The PFRDA will create eligibility requirements for potential pension fund managers (PFMs) and will define the number of PFMs allowed in the market. It has the responsibility of ensuring that only quality players become certified. It will also provide a regulatory framework within which PFMs will operate. Employees who choose to invest in the NPS will contribute 10% of their annual salary to a certified PFM, with the government contributing a similar amount. PFMs will provide three types of accounts for investors to choose among: safe, balanced and growth. It is hoped that this move toward privatizing the pension system will both increase rates of saving and capital accumulation, and relieve pressure on the government’s fiscal deficit.
The Indian government will shortly confirm how much foreign direct investment it will allow into the new pension system. It previously indicated that it will allow unrestricted FDI to enter the market. It is expected that it will take about a year to get the pension funds running.
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