Guaranteed returns can be dynamite, as examples as diverse as the collapse of the Unit Trust of India and the intractable pensions crisis in many developed nations show.
A parliamentary panel headed by Yashwant Sinha has made the same mistake, by suggesting that the returns on money invested in the struggling New Pension System (NPS) should not be less than what is offered on the popular employee provident fund (EPF) scheme. NPS was designed as a defined contribution scheme; it could be changed to a defined benefit scheme in case the government accepts this recommendation of the lawmakers.
NPS has not taken off, despite the fact that it offers citizens a choice of asset classes (including equity) and fund managers. A huge majority of the funds under management are from government employees, thanks to a decision in 2004 that all new civil servants will not get old-style pensions, but will have one-tenth of their basic pay mandatorily stashed aside in an NPS fund with the government making a matching contribution. The scheme is not mandatory for private sector employees.
The parliamentary standing committee has been thinking about the difference in the returns on NPS and on EPF in any given year. There are two problems here. First, there will always be years when the former delivers lower returns than the latter, especially when an NPS account is loaded with equity. Should the government cover the difference, as the lawmakers are evidently suggesting? But then there is clear evidence that equity is the best bet for long-term returns. Aren’t these long-term returns more important for a pension product than annual comparisons between equity and fixed-income returns?
Second, when it comes to comparing returns on these two social security schemes, the core problem is the above-market returns offered by the EPF scheme, a huge subsidy for the middle class and organized labour as well as a distortion of the local money market. The real task is not to ensure that NPS provides better returns to the EPF scheme in their current forms; it is to ensure that the interest rates on the latter are brought down to market levels so that more money can flow into the better-designed NPS.
There are other more important structural issues that need to be addressed right now. One suggestion made by pensions expert Gautam Bhardwaj in this newspaper today (see Page 17) is a national pension policy that “provides equal opportunities and identical rights to all citizens, regardless of their incomes and employment status, to achieve a dignified retirement”. Such a policy should allow portability across jobs as well as across various retirement programmes.
What needs to be done to make NPS more popular? Tell us at firstname.lastname@example.org