After years of delay which has harmed the retirement security of millions of Indians, there are welcome signs that pension reforms are receiving the attention they need. These reforms should have four major thrusts.
Illustration: Malay Karmakar / Mint
First, the pension regulator should be empowered. In the next several weeks, sustained pressure should be exerted on the United Progressive Alliance, or UPA, to push through the Pension Fund Regulatory and Development Authority Bill, which was first introduced in 2005. The pension regulator should get requisite political and resource support to emerge as an internationally benchmarked and respected pension regulator. Its scope should be widened to cover gratuity funds, superannuation plans, state enterprise schemes and pension schemes of public sector financial institutions.
Second, a policy environment should be created, and financial and capital markets deepened to enable Indians in both the formal and informal sectors to exercise choice in retirement provision with confidence.
The number of elderly (those above 60) in India is projected to increase from 90 million in 2005 to about 200 million in 2030, but each elderly person will have to be supported for a longer period. This is because life expectancy at age 60 (which was 16 years for males, and 18 years for females in 2000-05) is expected to rise significantly. And as females live longer, but have lower lifetime incomes, India’s pension system should have features which provide support for elderly women.
India is currently in a favourable demographic phase. The share of working-age population to total population is expected to rise till around 2035 — and then decline gradually. The Economist Intelligence Unit estimates that between 2005 and 2020, India will need to generate 142 million additional jobs, 30% of the world’s total. Many of these jobs will be in parts of the economy where there is no established long-term employer-employee relationship.
The current formal pension schemes for civil servants and for the so-called organized private sector workers are, therefore, unlikely to be available to a large proportion of the new entrants into the labour force. Even now, the formal systems at best cover only about one-fifth of the labour force. The recent decision of the Employees Provident Fund Organisation (EPFO) to extend its coverage to firms with 10 or more employees (compared with 20 or more) is unlikely to impact this proportion significantly, as EPFO’s administrative and management information systems are not in place.
As a growing number of young workers save for their retirement, pension assets will grow rapidly. The estimates for potential membership in the New Pension Scheme (NPS), announced in 2004, range between 50 and 80 million people. The impact on the number of Indians, both working and non-working, will of course be higher. A Hong Kong-based pension consultancy firm has estimated that by 2015, pension assets under NPS could reach $175 billion. These and other pension assets will increasingly be intermediated through financial and capital markets, as is the international norm. Developing vibrant markets for infrastructure bonds, corporate debt and municipal bonds will permit the growing pension assets to be channelled into areas critical for sustaining India’s continuing high growth.
The growing liberalization of investment guidelines of the provident, pension, superannuation, and gratuity funds — such as permitting non-government provident funds to invest up to 15% of assets in equities (compared with 5% currently) — is a step in the right direction.
India’s largest social security organization, EPFO, has assets of Rs2.4 trillion (equivalent to nearly 6% of the gross domestic product). It has not yet availed the 5% equity provision. This low accumulation of assets after 56 years of existence (and covering only 5% of India’s labour force) and its refusal to depart from a debt-only portfolio reflect the extent of EPFO’s unprofessionalism. It must learn to earn, and pay what it earns. It has made a start in this direction by recognizing that competition in fund management through competitive bidding is more efficient than a monopoly fund manager.
Third, EPFO’s role should be made consistent with international practices. EPFO’s role as a service provider, and as a grantor of exempt status to provident funds while acting as their regulator, is not consistent with good governance practices. Its outmoded investment portfolio is, therefore, also impacting the exempt and — under the 2006 Budget provisions — excluded trusts.
EPFO has a minister as its chairperson. Pensions, by their nature, require long-term focus and sustainability. A politician with relatively short-term tenure—and therefore incentives — is ill equipped to chair a pensions organization. So the governance structure of EPFO also needs to be brought in line with international practices.
Fourth, fiscal and public service delivery systems must be strengthened to provide at least minimum support to elderly persons, with financing shared between the Centre and the states.
Pension policies must address the needs of participating members, and not be overly solicitous of the convenience of service providers, whether government or private. If India succeeds in reforming its pension system, it will constitute a vital competitive edge and help sustain long-term economic growth.
Mukul Asher is professor of public policy and Amarendu Nandy is a PhD candidate at the National University of Singapore. Comment at email@example.com