Home / Opinion / One step forward, two steps back

The National Pension System (NPS; later renamed as National Pension Scheme) was born on the first day of 2004. It was expected to provide 300 million low-income informal sector Indians meaningful old-age income security through thrift and self-help. The committee that formed the scheme emphasized the importance of harnessing existing, regulated institutions for funds management, annuitization, administration, distribution and service outreach as a way to both expedite implementation and minimize costs. Through portable individual accounts and a simple menu of product and fund manager choices, NPS would deliver identical rights and an equal opportunity to every Indian citizen to achieve a financially secure and dignified retirement. A dedicated regulator would provide citizens, especially low-income informal sector workers in remote locations, with secure, convenient and affordable access to a well regulated environment to accumulate micro savings for their old age.

Ten years later, the Pension Fund Regulatory and Development Authority (PFRDA), which started out as a department under the finance ministry, has managed to put together most of the pieces of an ecosystem necessary for building a mass market for voluntary retirement savings.

As we stand at the beginning of a new year and contemplate priorities and actions over the next decade, it may be useful to pause and reflect on where we stand vis-a-vis our goals. What have we achieved over the past decade? What are our lessons from efforts and outcomes? What goals should we set for ourselves for the next 10 years? And what should be the first few steps that will get us there?

For the first few years since 2004, NPS was restricted to new recruits in central and state government departments who were obliged to join the scheme as part of new service rules. During this period, the PFRDA established a central back office for issuance and management of individual NPS accounts. It hired three public sector pension fund managers through an open bidding process to manage civil servants’ retirement savings.

By early 2009, roughly one million civil servants were already using the scheme for retirement savings on a mandatory basis. At this point, and under instructions from the government, the PFRDA permitted informal sector workers as well to also open NPS accounts on a voluntary basis. India Post, most scheduled commercial banks and some large third-party finance distributors were licensed to provide broad-based access to the scheme and related services. Seven pension fund managers were appointed, again through a bid on fees and charges, to manage non-government NPS assets using four simple product options.

Till this point, the PFRDA was on track with implementing the core principles and features. Although most ingredients for a pension mass market were clearly in place, the interim regulator struggled with achieving meaningful voluntary participation, especially from low-income households, the key NPS target audience. But this wasn’t surprising for several reasons.

First, the regulator had a near-zero budget for publicity and promotions. People were not joining the scheme simply because no one knew it existed. Second, most low-income households were not on the radar of banks and other entities that were responsible for distributing and delivering NPS. And third, the commercial incentives for NPS distributors were much lower than those given by mutual fund and insurance firms, but nevertheless prohibitive, especially for the poor.

As a result, the poor could not afford NPS while the rich were not being sold NPS.

At this juncture, the PFRDA should really have gone back to the drawing board on commercial incentives and implementation strategy. It should have gone back to the government for a sensible budget to support a meaningful and sustained, nation-wide promotion and public education campaign. Instead, the interim regulator embarked on a series of knee-jerk efforts that mutated the original NPS principles and architecture.

In 2010, the PFRDA announced a stripped down, lower cost “lite" version of NPS for the poor that took away the fundamental rights associated with individual choice. It appointed a large number of microfinance institutions, regional rural banks, government departments and others as “aggregators" to open NPS-lite accounts. This was done without adequately appreciating the risk of service interruptions due to a mismatch in the tenor of an aggregator’s relationship with a low-income client and the multiple-decade savings horizon of NPS. It allowed aggregators to collect intermittent, voluntary pension contributions in cash from the poor without putting up sufficient safeguards against the risk of theft or reconciliation errors. And it began focusing aggressively on the number of NPS-lite accounts rather than on persistent long-term savings behaviour.

In parallel, it decided to expand the number of fund managers, permitted active fund management, increased the fund management fees and charges and began encouraging pension funds to market the scheme. These measures are likely to produce higher costs and lower accumulations for NPS subscribers, complicate individual choice and divide the minuscule NPS assets across a large base of fund managers without a significant increase in scheme membership.

There are several important learnings from such actions as well as inactions over the past decade. As a statutory regulator, the PFRDA is well placed to more effectively meet India’s pension policy objectives. But to take the next steps correctly, it may be necessary for it to first take a few steps back. After all, where we will be with our pension reform in 2024 will depend almost entirely on what we do today.

Gautam Bhardwaj is co-founder of Invest India Micro Pension Services.

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