Even before the stock market-linked new pension scheme (NPS) could attract a sizable following, the government has decided to roll out a national retirement plan that promises a fixed income to the 400 million workers in the unorganised sector. In the process, it will whittle down the role of the NPS that was supposed to be the basis of the nation wide social security plan.
The central government has already begun working out the plan with states that have a reputation for being quick off the block. The department of financial services in the finance ministry has held detailed meetings with Haryana, Karnataka and Andhra Pradesh to launch the scheme soon. But pension sector experts have sharply questioned the approach.
According to Gautam Bhardwaj, chief of Invest India Economic Foundation, the think tank tracking the pension market, ?The size of the private pensions market that is achieved among unorganized sector workers will depend fundamentally on public awareness and the financial capacities and willingness of workers to make pension contributions over multiple decades.
A government officer involved in the discussion said a worker in any sector will now be promised a fixed monthly retirement figure to attract him to sign up for the scheme. The corpus will be made up of three parts.
The first will be derived from the monthly contribution he makes to a long-term pension plan that will be invested as per the guidelines of the NPS. This will be topped up with the funds most states provide from their budget to finance the old-age savings schemes. These schemes predate the NPS. If there is still a gap between the sum guaranteed to the worker and the two streams, it will be met from the central government purse.
This is a huge departure from reforms in the pension sector that had begun in the early part of this decade, with the support of the World Bank. The twin pillars of the reform were to cap the rapidly rising pension bill in the government budget, to free it for investments and connect the infrastructure sector with long-term funds that only pension and insurance companies can provide. The present pension liability of the central government is Rs 42,840 crore, which is about 1% of the GDP and 6% of the total government non-Plan expenditure for 2010-11.
D Swarup, the recently retired chief of the Pension Fund Regulatory and Development Authority, said the move was premature. ?NPS for the unorganised sector was made available only 16 months ago. We must give it some time to gather steam. Guaranteed return is not a part of the original design. Providing a guarantee will fundamentally change the character of the scheme and enhance the fiduciary responsibility of the government?. Just about 10,000 people outside the government have subscribed to the NPS so far, as per PFRDA data.
Officials said in view of the circumstances, the plan to provide a fixed monthly income at retirement is the best possible compromise between a conceptually brilliant plan like the NPS and the need to make a worker see a clear benefit before she commits money for up to 30 years to finance her retirement. But this assured benefit won?t be available for central and state government employees, who have had to compulsorily migrate to NPS. The government expects that as they put away a sizable part of their salary?10%, it will be able to generate enough returns from a collection of stock market and debt instruments over time, to create a sizable post retirement corpus for them.
The plan for the unorganised sector is very much in line with the current level of thinking in the finance ministry on long-term social security. In June, on the finance ministry?s encouragement, the insurance regulator has mandated the insurance sector to provide a 4.5% guaranteed return on the flagship product of the sector?Ulips, even though the returns on them are generated from the stock markets. A key rationale for launching NPS by the pension sector regulator was to avoid such guarantees. It is based on a defined contribution model where the employees finance their own retirement which is ploughed into the capital market by fund management companies, instead of a defined benefit plan, towards which the finance ministry is again veering.
While the changes will also expose the central government budget to a potentially sizable unfunded pension liability, government managers are confident a decade of strong GDP growth will give them the muscle to finance it. An additional rationale is the low average age profile of the Indian population at about 24 years, unlike India?s nearest competitor China, which is over 34 as on 2009.