Welfare spending should focus on pensions, old age care

PC Gupta

The pension scheme is structured for the benefit of the unorganised sector. Their familiarity with the type of investment portfolio suggested by the Oasis (Old Age Social and Income Security) report, prepared by an eight-member expert committee and commissioned by the ministry of social justice and empowerment, is minimum. Even most educated persons are risk averse and are found to be against equity investment in the domestic market, which is highly volatile, cyclical and suffers from numerous deficiencies. To add an international equity flavour appears to be untimely. To pass on investment risk to persons who know the least about such risks will hardly make the system work.

The successful launch of investment schemes by mutual funds of the type suggested by the Oasis report for the sophisticated and affording gentry are few and far between. The giant public sector insurance organisation has announced its first-ever investment-linked offer to the public. The response to it is yet to be gauged. It appears too much to digest such an undervalued risk for pension plans like this at the national level.

Other suggestions contained in the report are equally impracticable. Premature withdrawal from the Employees Provident Fund (EPF) will not be permitted, except in the event of permanent disability or death. Premature withdrawal should entail mandatory annutisation of the balance withdrawn. Participants in EPF should be given the choice of having contributions directed into the individual retirement account. Companies managing “exempt funds” should cease to manage these and hand over the accumulation to individual retirement account.

A major portion of the employers’ contribution stands diverted to the employees’ pension scheme (EPS) 1995. The balance accumulated can only be drawn for emergency needs, such as house construction, illness including illness of a member of family, physical handicap etc. This kind of facility is absolutely necessary to save the employees from debts being raised at high interest rates.

Yet another suggestion touched by the report is on EPS95. Higher benefits are to be obtained with better investment. The fear is that EPS is under- funded. It is suggested that government subsidy should be withdrawn and the contribution and benefit structure of the EPS and bank pension plan should be similar.
The doubt expressed by the report that the EPS is under-funded does not support the case for withdrawal of subsidy by the government. The logic that the structure of both the schemes should be similar is also not easy to comprehend.

Another area covered by the Oasis report relates to public provident fund (PPF). Fresh contributions to PPF are recommended to be ceased. Obligations in respect of old contributions are to be met as per the existing scheme. The withdrawal from a new scheme is only to be permitted at age 60, or in the event of death or permanent disability. The revised scheme’s assets are to be professionally managed by an independent board of trustees, not as a part of the public account.

In case of the revised scheme, 40 per cent of the assets are to be invested in state government securities. The return under the revised scheme should be market-driven. No figure has been quoted by the expert committee as to the amount withdrawn in the form of loan or otherwise. No year-wise analysis has been given about the progress of the scheme. There are no details of where to invest the balance 60 per cent. Without giving full details of investment, it is difficult to attract investors. There is no dearth of schemes where investors get market-driven returns. The attraction of the existing scheme is fixed return, which is why risk averse investors invest in it.

The committee has also recommended full funding out of contributions made by employees to the government scheme. The matter needs in-depth examination, which was probably not within the ambit of the study. No contributions are collected from the employees. The cost of entire defined- benefit pension is borne by the government. If a fund has to be created, it would require funding of not only current pension payments, but also pensions falling due in future, involving a huge amount.

In most countries, unorganised workers are the direct responsibility of the government on various counts — at least for pensions and long-term care. In fact, these benefits are extended to the entire population failing to satisfy “Means Test”. It is the high time the Indian government extended such benefits to its citizens. It should realise that much of welfare spending goes waste and does not reach the poor. Measures such as pensions and health care in old age homes etc. will benefit the needy directly. It is a pity that the government is haggling over a minor issue of no increase in railway fare with an eye on the elections, and does does not have improvement in services on its agenda.

Concluded. The first part of this article was published yesterday

(The writer is a consultant to HDFC Life Insurance)