Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Atal Pension Yojna is a bad deal

The guarantee in the Atal Pension Yojna gives the subscriber a bad deal

Atal Pension Yojna (http://goo.gl/Rs9Xqi ) was announced in Budget 2015-16 as an upgrade to the Swavalamban scheme, which will now fold into the new defined benefit pension scheme for the poor. The pension fund regulator will administer the scheme, which is open to all unorganized sector workers who currently do not avail of any social security scheme and have a bank account. Why this scheme? To give clarity of future benefits to the subscribers—something that was missing in the Swavalamban scheme, says a government note. This is an analysis of the product. Spoiler alert: ‘regressive’ is the word that comes to mind.

What is the product? It is a pension-oriented savings product that gives a defined pension starting at age 60. It can be boarded from age 18 to 40 and exit is at age 60. The government will match half the contribution of the subscriber, or 1,000, whichever is lower. If the subscriber saves 800 in a year, the government will put in 400. If the subscriber saves 2,000 in a year, the government will put in 1,000. If the subscriber saves 3,000 in a year, the government will put in 1,000. The monthly pension can be chosen from between 1,000 a month, at intervals of 1,000, and 5,000 a month. The subscriber will get the pension; on his death the spouse will get the pension, and when both die, the nominee gets the corpus back. The annuity looks very much like the Jeevan Akshay plan from Life Insurance Corporation of India (http://goo.gl/0QVZAU ) with the seventh option ticked.

My problems with the Atal Pension Yojna. First, I don’t see the government contribution in the numbers that the Ministry of Finance has put out. From the handout it seems that the purchase price of the annuity is given as the indicative return of corpus. Let’s work through one example. The fifth option has a pension of 5,000 per month and a return of corpus of 8.5 lakh. At age 30, the annual contribution is 6,924. The indicative corpus is then the final value of the sum of savings and returns earned. I find that the rate of return at which 6,924 reaches 8.5 lakh is 8.44%—not very different from the prevalent rates on Public Provident Fund (PPF) and Employees’ Provident Fund (EPF). But if I add the government additions to the savings for the same age and pension set, I get an internal rate of return number of 7.35% that yields 8.5 lakh. So, either the subscriber is not getting the government handout or is getting a sub-optimal return.

When you look at the returns on National Pension System (NPS) funds, you realize that the subscriber of the pension scheme is getting a pretty bad deal as returns of 7.35%, or even 8.44%, compare poorly with the return history we have of the NPS funds. The average return since financial year (FY) 2010 on the government bond schemes of NPS is 9.09%, on the corporate bond schemes it is 10.65%, and on the equity funds it is 13.25%. An average return (of the three fund options) of 10.67% would give the same saver above a corpus of 15.81 lakh, almost double of what she is currently getting. In giving a guarantee, the government is taking away the cream on long-term savings that will now go to the annuity provider insurance company. The guarantee in the Atal Pension Yojna gives the subscriber a bad deal—the sweetener is not that attractive after all.

Problem two: we’re going back from the clean product structure of the NPS to a world where fuzzy product structures allowed sub-optimal returns to savers and encouraged financial firms to charge high costs. The Atal Pension Yojna is a complicated scheme, which falls back in putting out a number that the subscriber will get rather than the indicative return that she will earn. Even the poorest of the poor understand the concept of rates of return. They understand that nau taka is more than double of a char taka return. IFMR Trust has a blog, http://goo.gl/bpyzRe , on how pathetic these monthly pension numbers look post the bite of inflation in the future. In 40 years, the value of 5,000 will be 710. The pulling and pushing of the NPS to suit various left or right ideologies must stop. It is a great product; please allow it to remain so.

Problem three, and this is a big one. We’re opening the gates of debate on returning to the realm of defined benefit in pensions. There is huge pressure from the post-2004 IAS officers to return to a world of defined benefit pensions. This will be a big error as it will totally destroy the target of limiting the fiscal deficit to 3% of gross domestic product and revenue deficit at 0. To leave you with a scary number. Gautam Bhardwaj and Surendra A. Dave, in a 2006 paper, (http://goo.gl/SJoEhO) estimated the implicit pension debt, or net present value of future pension promises, in 2004 to be 20 trillion.

End note: As luck would have it, while battling the numbers of Atal Pension Yojna, I happened to meet professor Muhammad Yunus at the NDTV Delhi studio—we were both panellists for a show. Within 60 seconds, he was explaining his version of a pension plan. People save each week a committed amount, say, 250 taka, he said. They do this for 10 years. And at the end of 10 years, we match what they have saved, he said. They can now take the entire corpus out or put it back as a fixed deposit and earn the same interest for as long as they want. “It is a very popular scheme and the poor love it for its simplicity," said Yunus. Do the poor get a bad deal? Nope, the product gives a compounded average return of 12.6% for a 10-year deposit.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

Close