In Search of Inclusion: Informal Sector Participation in a Voluntary, Defined Contribution Pension System

Abstract

This paper examines who contributes and who persists in contributing in a national, voluntary, defined contributory pension programme, where the government provides the incentive of matching contributions of a minimum amount (USD 16). The paper uses proprietary data from a financial services firm where 12 per cent of customers (37,000 individuals) chose to participate in this programme. The evidence shows that only about 50 per cent of contributors reach the minimum amount for the co-contribution, but that participants persist in contributing even if they failed to contribute the minimum amount in a given year. While this paper does not provide causal estimates, it does present evidence of considerable interest among the informal sector in a state-run voluntary pension programme in an emerging market where access to formal finance is otherwise poor.

Acknowledgements

We thank Robert Palacios and Ajay Shah for useful discussions. The paper also benefitted from comments at the Workshop on Emerging Economies at the University of New South Wales, Australia. We especially thank the staff of Kshetriya Grameen Financial Services (KGFS) for insightful discussions and access to data. Arko Bhattacharya and Parthasarathi Edupally provided excellent research assistance.

This data was obtained from IFMR Rural Channels Limited through a non-disclosure agreement (NDA), which prohibits us from sharing the data with anyone else. We will therefore not be able to provide the data in an Online Appendix, or make it available on request. However, we will be happy to forward the request to IFMR Rural Channels who may then enter into a new NDA with those requesting the data.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Palacios and Sane (2013) provide preliminary results on NPS-S participation based on a subset of the data presented in the paper. They, however, do not discuss persistence of contributions.

2. http://financialservices.gov.in/pensionreforms/PRstatistics.asp

3. Examples include 401(k) plans in the United States, or the Superannuation Guarantee in Australia, the National Pension Saving Scheme in the UK, and KiwiSaver in New Zealand.

4. For a description and a historical treatment of the NPS, see Sane and Shah (2011), Shah (2006), Dave (2006).

5. An individual is in the unorganised sector if (s)he is not salaried and does not have a provident fund contribution.

6. For example, the only benefit for destitute elderly in India is The Indira Gandhi National Old Age Pension Scheme (IGNOAPS), run by the Ministry of Rural Development. It provides a pension of Rs.200 (US$4) per month to those below the poverty line. State governments are encouraged to also provide an equal amount, bringing the total pension to at least Rs.400 (US$ 8).

7. http://financialservices.gov.in/pensionreforms/PR_newinitiatives.asp

8. In India, the retirement age for informal sector workers is set at 50.

9. This minimum pension ceiling may be revised from time to time.

10. KGFS is in the process of implementing an algorithm that presents each individual with the optimal asset allocation to meet the stated goals.

11. Ananth, Chen, and Rasmussen (2012) describe the KGFS operating model in detail.

12. The figure is truncated at Rs.5000, as a total of 15 households had contributed more than Rs.5000. The maximum contribution is Rs.15,200.

13. These characteristics may change over time. However, some of the changes may be a result of participation. We have therefore chosen to report the first observed characteristic to avoid the complications of reverse causality.

14. This also coincides with the decision of the government to extend to co-contribution scheme until 2016–2017. The extension to three more years may have motivated participants to contribute more regularly.

15. A central part of the hypothesis was the impact of the number of male children on participation. The gender of the child has not been recorded for a large number of cases. We therefore present results without this variable. The variable appears insignificant when included. Results are available on request.

16. See (Munnell et al., 2009, 2002)

17. Occupational pensions in India include a provident fund and pension scheme run by the Employees Provident Fund of India. These schemes are applicable only to those employees who work in establishments with 20 or more employees.