With increased life expectancy, coupled with traditional modes of income security like joint family systems facing collapse, there is expected to be a greater burden on our pension system. Gradual erosion of traditional old age support mechanisms and the rise in elderly population has highlighted the need for strengthening the formal channels of retirement savings.
The imperative, more proximate reasons for pension reforms are well known skewed coverage of the existing benefit schemes favouring organised workforce while informal employment is on the rise, worsening financial situation of the government pension schemes against a background of rising expenditure, an under-developed private annuity market and the need to increase the domestic rate of savings through higher contractual savings, to strengthen capital markets. Today, retirement savings invariably go into government paper, and in the process substantially increases long-term liabilities. The majority of workers, around 90 per cent, are today engaged in the unorganised sector. This includes professionals such as doctors, lawyers and small businessmen, which account for over 75 per cent of the population, and have no access to any formal pension saving system. The government could keep in mind following parameters when putting in place a pension system:
There is a need to have a sound regulatory framework for the pension business. This would give individuals a fair degree of confidence with respect to risk management, mis-selling and prevention of fraud.
The task of providing pensions could be divided into the accumulation stage and the payout annuity stage. Only pension managers and administrators could be allowed to participate in the accumulation stage, while payout annuities could be the exclusive domain of the life insurance companies.
Investment management expertise, coupled with the capability of offering a combination of administration and low cost transaction processing, would significantly benefit Indian citizens. Asset management companies have the infrastructure to develop and offer pension products, and the investor should be given choice and flexibility in terms of selecting his fund manager, as well as annuity provider. We recommend the opening up of the pension sector to asset management companies and specialists in retirement products, who have demonstrated strong administrative, record keeping and investment management expertise. Regardless of competing pressures, the new pension system should ensure the well being of individuals who are the contributors & are preparing for old age. This requires sound governance and a sound pension design. Individuals participating in the pension system should have incentives to take interest in the functioning of the system, and block appropriations of their retirement savings.
The challenge in building a pension system also lies in obtaining low administrative costs, nation-wide collections, and adequate simplicity for participation for millions of people.
(The writer is Chairman, Ficci Pension Reforms Committee, and CEO of IDBI Principal)