Approval of the PFRDA Bill by parliament is a historic victory in India’s battle against its looming old-age poverty crisis. The social and fiscal cost of a tax-funded social security would have been far more than India can imagine or afford. The current 100 million elderly, most of whom were excluded from formal pension arrangements while they were young, today face the grim prospect of living for another 20 years in poverty. They are a stark reflection of the huge cost of sustained policy inertia on pension reforms in the past.
The National Pension System (NPS) on the other hand, can produce a dramatically different outcome for the next generation of India’s elderly by providing millions of young citizens with a simple, secure and affordable mechanism to accumulate savings for their old age. Armed with a legislation, the PFRDA can also provide greater business-level confidence to both existing and future market participants eyeing India’s huge latent retirement savings demand. Equally, the rapidly-growing NPS subscriber base can now march towards retirement with greater confidence and a sense of security regarding old age savings.
First Dhirendra Swarup and then Yogesh Agarwal, at the helm of the Pension Fund Regulation and Development Authority, have already spent the last few years in carefully putting together most of the critical pieces of the NPS architecture. With a team of credible pension fund managers, a robust central record-keeping and administration platform, pan-India outreach and access through banks and other third-party distributions, well-regulated annuity providers, modest fees and charges and a track-record of impressive investment returns, we are well placed to jumpstart the next stage of NPS expansion.
However, considering the size and heterogeneity of India’s pension coverage gap, the task ahead will be daunting at best. Nowhere in the world has any country succeeded in achieving the scale of voluntary pension coverage that the PFRDA will need to attempt within a remarkably short window of India’s demographic transition. The challenge before the regulator will be even greater as it targets millions of individuals with modest intermittent incomes, negligible financial literacy and limited banking-access spread across urban and rural locations. The regulatory and business response using NPS will therefore need to be well-planned and coordinated to best meet its core policy objective.
The version of the legislation approved by parliament has two important deviations from the original OASIS proposals—guaranteed returns and pre-retirement withdrawals. Although some tradeoffs in