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Business News/ Opinion / Time to get the governance of pension plans right

Retirement, pension and long-term savings have been a source of progressive public debate over the past few months. Now is the right time to take a close look at how the country governs retirement plans and how different population segments will have access to financial security in old age. Fortunately, India has the benefit of time to get things right and with some small steps and wider support of the public and companies, we can take some important initiatives to make our overall pension system sustainable, transparent and well-governed.

Though India has one of the youngest populations in the world, by 2050 we are projected to have amongst the largest number of people in old age (over 300 million people). Average age is projected to increase to the mid-thirties and birth life expectancy is set to increase by over 5 years. These facts and projections are the fulcrum around which retirement adequacy plans will need to be conceived.

Formal employed individuals are fortunate to have some statutory benefits in the form of provident fund (PF) and gratuity. A number may also have access to superannuation plans or other pension plans (in particular, government and public sector employees). Studies clearly indicate that employees place a high degree of reliance on these benefits for their longer term financial planning. However, there is an opportunity to improve the consistency in understanding, visibility and governance of these employer plans when these are administered through a separate Trust.

While the Employees’ Provident Fund Organisation’s (EPFO’s) requirements for any PF Trust are well defined, the same can’t be said for gratuity, superannuation and other pension trusts. For one, I don’t believe anyone in the country knows exactly how many of these plans there actually are, and that to me is a red flag.

Anecdotally, there would be tens of thousands of such Trusts. The only governing body for such non-PF trusts is the tax office, as every Trust is to be approved by the income tax office (ITO). However, the scope for the ITO is limited and there is no consistent mechanism for oversight on items such as Trust financials and documentation, trustee capability and investment pattern adherence to Ministry of Finance rules.

Without some of these, how can employees have confidence in Trust administration, benefit provision and funds management?

Some prevalent examples of oversight include not having documentary evidence of the Trust being ITO-approved, originals of the Trust deed and rules being outdated or even lost, and lack of clarity in dealing with employees’ liabilities and Trust funds in case of transfers within group companies. Poor awareness around third-party administrators managing Trust records, service levels and reconciliations is also a concern. In some cases, companies have mistakenly believed that having a group gratuity or superannuation policy with an insurance company meant not requiring a Trust deed and rules and that their policy is automatically ITO-approved.

A framework is required to build sophistication over time. The Pension Fund Regulatory & Development Authority Act (PFRDA Act), passed by Parliament in September 2013, suggests that the Authority could be the body to formulate such a framework for pension schemes that are not regulated by existing legislation. This would not include PF Acts where the PFRDA Act is not applicable.

For the remainder non-PF Trusts, why not evolve a framework within the gambit of PFRDA?

A good start would be to conduct a comprehensive census of all the plans out there and at the very least ensure that each one is authentic and has requisite documentation. This is not an easy task but the information does exist between income tax offices, insurance companies and companies themselves. In the future, guidelines can be framed for trustee board composition and education, disclosure guidelines to employees or members, investment policy and performance monitoring, funding contribution principles (defined benefit plans) and general board activities.

We could learn from some of the principles laid out in the UK’s Pension Act, 1995. Some of the notable regulations were around establishing a special Occupational Regulatory Authority; greater disclosures to members of plans; minimum member nominated trustees; introduction of clear documentation showing what should be paid into a scheme, and monitoring of those contributions; whistle blowing responsibilities of third-party professionals.

Other countries have also introduced reforms to enhance coverage of pension plans, increase administrative efficiency as well as increase adequacy and sustainability of pensions.

These initial measures will benefit us in India in a way that the government is better able to draft policies, companies will benefit from the guidance and consistency in understanding; and finally the employees or beneficiaries will benefit by being more aware and holding their employers accountable as custodians of their long-term financial security.

Eventually, getting retirement benefits governance right today would be an important step in driving India towards being a pensioned society in the future.

Kulin Patel is director, Willis Towers Watson India.

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Updated: 01 Jun 2016, 04:31 AM IST
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