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Governance: an area of deficit in pensions

Pensions are no longer edifices of labour laws. They work at the intersection of multiple and often conflicting laws: financial, Trust, tax and labour. All this needs fiduciary focus and good governance

Rob Reiner’s A Few Good Men remains a favourite, even a good two decades after I first watched it. There is a scene that features Lieutenant Daniel Kaffee, played by Tom Cruise and Colonel Nathan Jessup starring Jack Nicholson, sparring in court. Kaffee has just incited Jessup. A hubristic Jessup launches into a tirade, where he says: “I have a greater responsibility than you possibly can fathom."

I would like to believe that the people and institutions that design, legislate, implement and oversee provident fund (PF) and pensions, think like Jessup—that they have a greater responsibility than anyone can fathom. But occurrences over the years prove otherwise. Governance rarely bears a mention in the field of pensions, resulting in indifferent and often, poor governance. Let’s look at some of the widely quoted instances of not-so-great governance in the pension sector:

* In 2008, the government changed the PF regulations to make it mandatory for expatriate employees to contribute to the Employees’ Provident Fund (EPF). Expats that come to India are unlikely to retire here and should not find place as contributors in a retirement fund that is meant to provide retirement income to Indian employees. Their accounts are not even treated as inoperative ones if there is no contribution for 3 years and, therefore, earn a share in the overall earnings of the fund. But for an Indian employee in a similar situation, the account is treated as an inoperative one, resulting in no interest credit. A genuine beneficiary, therefore, loses out to one who has no reason to be a member.

*A better known case of poor governance is the number of times the Life Insurance Corporation of India (LIC) uses investor funds to bail out the government’s divestment programmes. What this means to investor and policyholder returns is a subject of many a study that could not be completed because portfolios are not disclosed.

What should governance mean in the context of pension in India? Most experts use postulates derived from Western regulations such as the US’ Employee Retirement Income Security Act, 1974, to provide the definition. Ethical decision-making without interfering conflicts, transparency in dealing and transactions, fiduciary underpinnings in responsibility, and continual and meaningful communication to beneficiaries are phrases that come to my mind while laying out the tenets of pension governance. These will enhance credibility, improve coverage and overall result in the much-talked of pensioned society.

Drivers of pension in India

When my parents were working, pensions, gratuity and superannuation regulations flowed from the EPF, and the Payment of Gratuity Act, 1972 and employers were fiduciaries. Today, pensions additionally mean: the National Pension System (NPS) and retail pension products, regulation flows from the PF and gratuity Acts, the income tax Act, the Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India (Irdai), and Pension Fund Regulatory and Development Authority (PFRDA).

Pensions are no longer edifices of labour laws. They work at the intersection of multiple and often conflicting laws: financial, Trust, tax and labour. All this needs fiduciary focus and good governance.

Changing face of beneficiary

The beneficiaries of pension have changed irrevocably. Financial literacy, changing retirement needs, income growth and advent of technology has meant that expectations from pensions have evolved. From the garment factory worker, who struck work in Bangalore forcing a rollback of design changes to EPF, to thousands of netizens who petitioned the finance minister to change the proposed taxation of PF, everyone now is stakeholder in pensions. This surely signals the desperate need for governance.

Evolving investment allocation

A more tactical driver to greater governance in pensions would be the way the money is invested. Better choice in investments could mean potential risks, which necessitate more policies, transparency in dealing, enhanced controls, reporting, oversight and communication to beneficiaries.

At the root of the reform agenda in this area is reforming trusteeship. Nothing ails the Indian pension sector more than the state of trusteeship. It is ill-defined, under-supervised, conflict-riddled and often delivers little value to the pension ecosystem. Regulation governing retirement plan trusteeship hardly exists. Most Boards of Trustees of Indian retirement plans are constituted in unscientific ways, resulting in failure to deliver the objectives. The government should bring about regulations in this area and change the manner in which some of the larger pension boards under its watch function—such as the Board of Trustees of the EPF. Better trusteeship has the potential to change the landscape of Indian pensions since an empowered trustee can bring significant changes to design and delivery of these plans.

The Indian retirement planning space is going through a phase of evolution. Changes in design and delivery models, an influx of new products and producers, developing needs of participants are just some of the drivers in this evolution. The government and other stakeholders should start thinking about the need for codified governance akin to practices in other walks of life. Continued absence of good governance will spell a ‘Code Red’ for pensions in India. Do watch A Few Good Men to know the meaning of code red.

Amit Gopal, senior vice president, India Life Capital Pvt. Ltd

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