Home >Opinion >A nudge towards savings

Join the New Pension System (NPS) starting this April and the government will gift Rs1,000 into your account every year. Finance minister Pranab Mukherjee needs to be applauded for this Budget announcement. However, this might only be the first step towards addressing the challenges facing NPS.

I guess people who are financially savvy will be the early suspects to open NPS accounts. For them, the Rs1,000 may not itself mean a big deal; so Mukherjee could have given an additional tax benefit instead of the Rs1,000 co-contribution if he had this audience in mind. But he didn’t. The intention is clearly to reach out to that section for whom such direct tax benefits are irrelevant.

Around 88% of India’s workforce is outside of the formal sector. These mostly comprise self-employed, low-income workers engaged in manual or semi-skilled work. As things stand, they will continue to work even in their twilight years just to make ends meet. It will, therefore, be worthwhile for NPS to encourage them to start saving small sums while they are still young.

But how does the government do so? NPS opened to all citizens in May 2009. However, less than 4,000 people have so far joined.

This is despite its excellent features. For instance, NPS transparently tells you its fees and charges, unlike banks and insurance companies that are used to selling you the “Red Ferrari" without saying what is under the hood. Therefore, these institutions usually focus on other products promising better margins—meaning higher costs for customers. So customers who are used to their promises of “high returns" with no discussion on “cost" have perceived NPS as “expensive".

The government is now hoping that the co-contribution will do the trick. The Pension Fund Regulatory and Development Authority (PFRDA) has finalized plans to offer NPS to worker groups at lower cost through the so-called “NPS-lite". Under this, the scheme shall be delivered through groups, though customers shall get an individual account. Employers could deliver the scheme to their workers by becoming a nodal agency with PFRDA, replacing the distributors. Other worker groups could also come together to become nodal agents.

So will everyone just queue up on 1 April to open their accounts? Our experience at Invest India Micro Pension Services—of enrolling 50,000 low-income unorganized sector workers under the Rajasthan government’s co-contributory Vishwakarma Pension Yojana, where a similar Rs1,000 incentive exists—offers some important learning.

Co-contribution does not work like other subsidies which usually result in instant gratification. Here, a customer will need to first save his own money in NPS to get the benefit. The benefit will be in the form of a higher pension at the age of 60. For low-income workers, who look at their finances on a daily or weekly basis, this seems a long-term story that they will need to buy into.

So after the first step of allocating Rs100 crore for the co-contribution, the next step should be to reach out and actually deliver NPS to one million workers by March 2011.

It might be simplistic to expect employers and worker groups to turn into NPS salesmen. At best they could assist in reaching out to the workers. The last mile will need to be built well to ensure groups of workers get good services and to ensure that worker interests are protected. This means using capacity, or economies of scale, to reach out to worker groups, small shopkeepers, daily wage labourers, street vendors, small farmers and semi-skilled workers. Some handholding, along with ongoing efforts, would be needed to ensure those who enrol do actually save year after year.

If this succeeds, Mukherjee could be persuaded to raise the outlay to Rs1,000 crore next year, which may motivate 10 million low income unorganized sector workers to save for old age. This, without leakage and with Rs1,000-12,000 crore inflows from workers as annual savings.

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