UNEASY REALITY

Vikas Dhoot

The Indian pension system is a mess. There's been a lot of talk about reforming it, but most of it has been hot air and nothing has happened. As early as 1957, the Second Pay Commission had suggested that government employees' pensions should be paid out of a separate fund instead of the public revenue account. Ignoring that recommendation has proved expensive as today the pension bill has bloated to 15.1% of the outstanding liabilities of the Central government and 15.5% for the state governments. The Eleventh Finance Commission alluded to them as 'a ticking time bomb'. 

The Employees' Provident Fund, in its 50 years, has increased its coverage of the workforce from 1% to a measly 5%. The problem is almost 90% of India's working population is in the unorganised sector - taxi drivers, salesmen, your domestic help and 360 million others. What about these people? Don't they deserve to retire in dignity? An effort started at the state level in the 60s was formalised nationally in 1996 as the National Old Age Pension Scheme. This social assistance scheme provides a measly Rs 75 per month to the elderly poor. However, according to R. Palacios of the World Bank: "There is almost no information available on poverty among the elderly and little evidence of the impact of these meagre cash transfers. In fact, several studies have raised concerns about targeting, administrative efficiency and even corruption."

In 1999, the OASIS Committee was set up to look into setting up a voluntary social security scheme to cover the informal sector. The committee's report in 2000 recommended a system whereby one could save sums as low as Rs 5 a month into an individual retirement account with a menu of investment plans to choose from different private sector pension fund managers. 
The OASIS report has been the beacon of hope for pension reforms in this country ever since, but it seems to be gathering dust. Government bodies like the Employees Provident Fund Organisation (EPFO) have strongly resisted it and have brashly turned down its simple suggestions for improving functionality - like restricting or taxing pre-retirement withdrawals. The average balance in EPF accounts at retirement is just Rs 19,000, barely enough to buy an annuity of Rs 140 per month - not enough to protect retirees from falling below the poverty line.
In March 2001, the then finance minster Yashwant Sinha announced a move towards a contributory scheme for civil servants and a new informal sector scheme. This led to the Bhattacharya Committee on Civil Service Pensions and an Insurance Regulatory Development Authority (IRDA) panel on a voluntary pension system. Bureaucrats, more concerned about their own retirement money, pushed through the easy parts of the Bhattacharya Committee's recommendations immediately - now all new civil servants have an element of contributory pensions plus some guaranteed benefits.

In March 2002, the government said the IRDA panel suggestions will be implemented by June 2002. Though past the deadline, the good news is IRDA's report has been discussed by a group of ministers, including the minister in charge of pensions, Vasundhara Raje. It is committed to approve the report and sources tell us IRDA will be given the additional mandate of regulating and implementing this voluntary system. 

The scheme will be run by selected private sector life insurers and PF managers. Unlike the existing schemes that provide a lumpsum at retirement, this system will automatically transfer the savings at retirement, from pension funds to an insurer for buying an annuity. IRDA chairman N. Rangachary reasons that since the annuities market is run by life insurers, and considering his insurance mandate, he will be in the right position to regulate this new system. He says he's ready to start work on it tomorrow. Sounds good, but will it hold us in good stead? Not necessarily. 

Mukul Asher, professor of public policy at the National University of Singapore says: "IRDA getting the mandate for private pension schemes regulation will not solve the problem of multiple agencies involved in the Indian pensions system. There's a need for a superregulator, like the one UK and Australia are heading towards, to oversee all these." 

The problem with pension systems really is that no one has the perfect solution. In 1994, the World Bank report titled Averting the Old Age Crisis set a formula based on principles of multi-tiered retirement support programmes with mandatory as well as voluntary pillars, equity investments, private pension fund managers, menu-based investments, et al. But the recent global financial market blowout has shown that this is not enough. In the UK, where privatisation was hurried in, it has benefitted the finance industry more than its workers. A mis-selling scandal perpetrated by pension fund managers there has led to millions of people losing 75% of their retirement savings in the equities crash.

We shouldn't walk into this trap. Few will understand multiple products with mutliple riders offered by insurance and mutual fund industries. These are already mis-sold by the private sector, can we expect anything else from the same people running pension funds?