Every now and then, the New Pension System (NPS) manages to cut through the clutter and move up the policy agenda to make it to the the front pages of newspapers. But we rarely see useful answers to fixing India’s gigantic pension coverage gap within the rapidly shrinking window of our demographic advantage. Perhaps we are not asking the right questions.

Graphic by Shyamal Banerjee/Mint

As things stand, however, barely 50,000 people have signed up for the NPS over the last two years, though nearly 10,000 bank and postal branches offer the product. Early evidence suggests that we must urgently do many different things and many other things differently to ensure that we do not share the fate of Public Provident Fund (PPF) in terms of suboptimal coverage. After all, the PPF uses a similar distribution model and was launched in 1969 for precisely the same reasons. Fundamental questions regarding NPS should, therefore, focus on an effective policy and a regulatory and business response to motivate the nearly 100 million workers in the informal sector to start using this scheme.

In this context, it is not entirely clear whether or how imposing a 26% foreign direct investment limit on NPS intermediaries, or pegging NPS returns to EPF, or even permitting NPS subscribers to consume retirement savings before they retire, will solve India’s old age poverty problem. It is clear, however, that such proposals may significantly contaminate the original NPS design. And perhaps produce perverse and unpredictable incentives and behaviour at the level of NPS subscribers and intermediaries.

Importantly, NPS is intended as a retirement solution for those who can afford to save for their old age while they are young. But since many Indians simply cannot afford thrift and self-help, it is fairly obvious that NPS is not a universal solution to India’s larger old age poverty problem. For example, the NPS cannot provide a retirement income to the nearly 150 million lifetime poor, who will not be able to set aside anything for their old age. Or for the roughly 100 million unpaid workers, who have no income to support NPS contribution. Or for the over 75 million informal sector workers, who are now nearing retirement or are already above 60 years of age.

Nevertheless, much of the policy debate surrounding India’s pension reform gets hogged by the NPS. This leaves little room to reflect on the nearly 100 million current destitute old who are constrained to manage with the roughly 13 a day that some of them receive under the Indira Gandhi National Old Age Pension Scheme. Or on the nearly 50 million formal sector workers, who are forced to save a quarter of their incomes with the EPFO but continue to face inadequate terminal accumulation due to outdated investment policies, suboptimal returns, inefficient administration and liberal pre-retirement withdrawals.

A casual observer of India’s pension reform saga may naturally assume that the hyper-focus on fixing the NPS is consuming the entire available policy and regulatory bandwidth needed to solve India’s larger old age poverty problem. This is incorrect. A fundamental reason that many questions regarding India’s pension coverage gap remain unasked or unanswered is that we do not yet have a comprehensive and inclusive national pension policy. Instead, we have a set of many fragmented solutions that are either too expensive, or inadequate, or ineffective.

As a first step, therefore, Parliament should announce a national pension policy that will deliver all citizens a uniform right to a dignified and secured old age, regardless of their income and employment status. This should be followed up by establishing a robust regulatory mechanism through which the rights and old age benefits of all citizens (and not just of those who decide to join the NPS) are adequately protected. This national pension policy should also articulate a clear benchmark on adequacy of benefits and provide citizens full portability between the presently fragmented retirement programmes.

A well-articulated policy goal would more meaningfully direct the design and implementation of sustainable pension programmes that conform with old age income security objectives in ways that both meet the needs of India’s 450 million workers and protect the fiscal position of future governments. This will also direct improvements to existing systems and provide an objective benchmark by which their performance can be measured.

In this process, the pension sector regulatory and supervisory infrastructure would perhaps need radical reorganization. The Pension Fund Regulatory and Development Authority (PFRDA) may be a logical place to consolidate pension sector regulation. The draft PFRDA Bill should, therefore, be reviewed in this specific context. And to satisfy ourselves that the regulator would indeed have the ability to regulate and supervise the full range of existing and future retirement programmes, including the NPS.

Armed with a national pension policy, an appropriate regulatory mechanism and a set of effective tools that address the larger problem of pension exclusion, the government should turn its entire attention and energy to rapid scale-up and implementation monitoring. After all, the cost of delay or failure with pension reforms will always be much more than we can imagine. Or afford.

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

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