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10 | ifr special report | September 2009 ASSET MANAGEMENT

India’s growing financial sector may have come a long way in a short timeframe, but optimists believe that things are just getting started. They argue that the next 10 years will see more changes than the past 25 years, especially in the asset management space. Even with a slower economy, analysts expect to see a four-fold increase in India’s investable wealth from US$250bn in 2007 to US$1trn by 2012.

Funds to the fore T

he pension market, while now very small, is expected to grow, while financial asset

management is expected to rise from US$83bn to US$520bn by

2012. Despite pending government reforms aimed at the pension market, the scope for foreign pension managers is still limited. But on the asset management side, the potential is vast.

According to a new report released by an expert panel appointed by India’s national government, the pension market will grow to about US$84bn by 2025. A small portion of the working population is covered by the statutory benefit scheme, but there are voluntary schemes offered by life insurance and mutual fund companies. Demand for such voluntary schemes is stimulated by their tax benefits. India’s asset management industry is expected to record a compound annual growth rate of more than 20% from 2007 to 2013. While equity-linked savings schemes and equity funds are likely to record the highest growth, other market segments also hold tremendous growth opportunities. Due to the economic crisis, assets under management in India fell to about US$83bn at the end of March 2009 from more than US$92bn a year earlier. In May 2009 there was a sharp rise and assets under management were reported at US$134bn. The Boston Consulting Group now forecasts that assets under management could grow to US$520bn by 2015. More than 20 foreign asset management companies are considering entering the Indian funds market.

India has nearly 80m elderly people and this segment of the population is growing by 3.8% a year. Most of these people are dependent on their savings and their children or other relatives because they are not covered by any formal retirement income scheme. Pension policies in India have traditionally been based on financing through employer and employee participation. As a result, only about 12% of the working population in India is covered by some type of a retirement plan and the vast majority has no access to retirement plans. There is a statutory pension scheme, which covers about 40m employees in

organised sectors. There are other voluntary pension schemes available for the general public – offered by life insurance companies and mutual funds – but these schemes cover a tiny 1.6m of the population.

The existing pension system leaves more than 88% of the Indian workforce uncovered. During the past few years there has been a marked shift in pension policy in India, which has culminated in the introduction of a New Pension System (NPS). Under the NPS, at the time of retirement there will be compulsory annuitisation of at least 40% of the accumulated pension wealth and there will be multiple pension fund managers licensed by the Pension Fund Regulatory and Development Authority (PFRDA) to manage the fund. An option that will be available is to transfer accumulations from one fund manager to another. A fixed return of 8% a year was given by the government on total pension contributions received from employees as well as the government’s matching contribution. Upon realising that returns could be in the range of 14%–29% a year if fund managers were engaged, the government appointed the State Bank of India, Life Insurance Corp and Unit Trust of India-AMC as pension fund managers.

According to the government- commissioned report, the projected growth of pension funds would largely be due to normal economic growth rather than the significant increase in coverage that reforms in the pension and insurance sectors will produce.

Asset management

According to a McKinsey study, India offers many opportunities for asset managers. The asset management business is nascent, but has been growing 47% annually since 2003 and is forecast to grow at 33% a year over the next five years. The main drivers of this will be the retail segment, expected to grow at 36% annually, and the institutional investor segment, expected to grow at 29% annually. This would take assets under management to US$520bn by 2015, from US$92bn in 2008.

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