Contribution Pension Research Paper

Pensions represent long term policies. From the inception of policy to the end it may even take half a century. When it takes so many years, risk is inevitable. The risk distribution in defined benefit and defined contribution system is different. People who avail defined contribution pension systems faces variety of risks. The contribution depends on the contributor’s income and duration of employment. After the contributions are made the rate of accumulation depends on interest rate, dividend payout and movement in asset prices. There are significant chances of fluctuation in the three of them. The average over long periods of time show less variation as compared to year to year changes, the pension that an employee shall be entitled to will

They have many other resources to fall back upon, but low wage earners want assured returns, which would guarantee their well-being. Unfortunately, most Indians are in the latter category. Index funds are subject to ‘tracking error’. In a developing country like India, the error can be very high for several reasons. The first is frequent changes in the composition of the index. Major benchmark indexes around the world are loaded with a few big stocks. There is much higher risk in index investing than people perceive. Float of various securities included in the index for trading in the market varies a great deal and it is not easy to acquire designated scrips in proportion to market capitalization. Impact cost across securities varies a great deal. There may be relatively low asset management fee in indexed funds compared to actively managed funds; however, most of the other administrative expenses remain same. Experience in many countries shows that competition among funds has failed to curb operating costs. Firms have spent heavily on advertising and agents and if individuals are allowed to switch among funds at their will, these companies get into ‘transfer wars’ to have a larger assets

There has also been some reforms in the pension sector. Unlike comprehensive reforms in the other financial sectors, the reforms in the pension sector have been insignificant. This marks that perhaps this is intentional and the pension system is given low priority. Pension system is heavily regulated by Government authorities. State control and administration has hindered growth of pension system. Life Insurance Corporation of India (LIC) has been acting like a monopoly for many years in the private pension scenario and it should be removed. The expenditure of state and central run pension programs is significantly high and it accounts for around 1.5% of the GDP. It also accounts for a quarter of the entire fiscal deposit. There are many reasons behind this. The first reason is that the advents in the field of health and medicine have increased people longevity and people have now started to live longer. Secondly the generous wage settlements by the pay commissions have increased pension burden. Thirdly, the decline in the recruitment of fresh people is also affecting it. The Malhotra Committee (1994) studied the insurance sector and it suggested opening up of the insurance sector. As a result, the foreign insurance companies are now allowed to enter the insurance sector. (Goswami,