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The winding, (sometimes) bumpy road to pension reform

With increasing longevity and the rise in the number of the elderly, it was clear that the pension scheme would leave a huge hole in the government’s coffers in the medium and long term.

Written by Shaji Vikraman | Updated: April 5, 2017 6:07:48 pm
pension, india pension, india pension scheme, epf, epf india, india epf, provident fund, india provident fund, employee provident fund, india news The aim was to design and implement a formal pension system for the millions of Indians who, unlike government employees at the Centre and states, were not covered by any post-retirement social security net.

In 1998, when the United Front was in power, the Ministry of Welfare, as it was then called, was reviewing the National Old Age Pension Scheme, which envisaged a monthly pension of Rs 200 for destitutes and those above the age of 65. With increasing longevity and the rise in the number of the elderly, it was clear that the scheme would leave a huge hole in the government’s coffers in the medium and long term. As the magnitude of the challenge hit officials in the Ministry — among whom was Anand Bordia, who had studied pension models in other countries — it was decided to work on what was named Project OASIS, or, Old Age Social and Income Security. Surendra Dave, a former chief of UTI and the first chairman of SEBI, was chosen to head a committee for the project. The aim was to design and implement a formal pension system for the millions of Indians who, unlike government employees at the Centre and states, were not covered by any post-retirement social security net.

The OASIS Committee submitted the first draft of its report in early 1999. Maneka Gandhi, the Minister for Social Justice and Empowerment, recognised the challenge and went, along with members of the Committee, to Finance Minister Yashwant Sinha to make the point that the project, though aimed at designing a pension scheme for the informal sector, had ramifications far beyond what could be implemented by her Ministry — whose budget was only Rs 1,000 crore, and which had a host of schemes to fund as well.

Around the same time, the challenge of paying pensions to lakhs of government officials was apparent to many in the Finance Ministry. A working group to assess the pension liabilities of the central government was set up in 1999 under the then Comptroller and Auditor General (CAG).

Following discussions between Sinha and Prime Minister Atal Bihari Vajpayee, a rare instance of voluntary ceding of turf by a minister was witnessed — the handling of the pension scheme was moved from Maneka’s ministry to the Ministry of Finance. In January 2000, the OASIS report was finalised and submitted to the Prime Minister, and work on implementing the recommendations began.

The Committee suggested a move towards a pension scheme with defined contributions and individual accounts without any defined benefit at the end of the scheme — unlike a government pension plan where staffers are paid a fixed amount every month on retirement. Benefits would be based on returns generated by the scheme run by professional managers, the Committee suggested — ensuring that the onus of funding such schemes didn’t fall on the government.

The Committee also suggested a regulator for a pension scheme for the informal sector, the Indian Pensions Authority, and changes to social security schemes such as the Employees’ Provident Fund (EPF) and Employees’ Pension Scheme (launched by the P V Narasimha Rao government in 1995), as well as reforms to the civil service pension system.

Policymakers were then looking at pension reforms case studies in several countries. Ajay Shah, who was part of Project OASIS, was brought in as a consultant in the Finance Ministry to work with officials such as U K Sinha and before him, Jaimini Bhagwati, on pension reforms. After discussions within the Finance Ministry led by Secretary S Narayan, the idea of widening the project to redesign the pension framework for civil servants was mooted, which was subsequently approved by the Prime Minister.

In his 2001 Budget, Sinha announced a roadmap for a new pension scheme for civil servants and others where the final accumulations would be based on the returns generated by the scheme which they opted for — and not a fixed amount that civil servants were getting then. There was some resistance from the EPFO and the Left parties to the proposal to let private fund managers handle long-term funds, and to the plan of investing pension money in stocks. Trade unions too were initially unhappy. In August 2003, the Cabinet approved the formation of an interim regulator, the Pension Fund Regulatory and Development Authority (PFRDA), and in December, after discussions with Jaswant Singh who had replaced Sinha as Finance Minister, Vajpayee signed off on the file to implement the new pension scheme from January 1, 2004. Finance Ministry official Vinod Rai was appointed chairman of the interim PFRDA.

After Manmohan Singh’s UPA government took office in 2004, pressure started to build to review or drop the new pensions scheme and the proposed reforms. Adding to the challenge was the fact that the UPA had to lean on the Left parties for support. On the other hand, insurance companies were lobbying to get into a potentially lucrative long-term business. At a meeting with the Finance Ministry, insurance chiefs pitched strongly for their firms to be allowed to offer pension plans, and asked that it be regulated by the insurance regulator, Insurance Regulatory and Development Authority (IRDA). Dave made it clear that the heart and soul of pensions was defined contributions, and not defined benefits. Besides, insurers had no edge in this business, which was about funds management.

In the end, Finance Minister P Chidambaram decided to go with Dave, and an ordinance was issued in November 2004. But enacting the law proved to be tough — the Left dug in its heels and forced the Bill to go to Parliament’s Standing Committee on Finance. But as back channel meetings involving Ministry officials and top political leaders to sort out the issue continued, the Committee endorsed the Bill, saying it was an urgent necessity.

During that period, K P Krishnan, then joint secretary in the Ministry, and C B Bhave, who headed the National Securities Depository Ltd (NSDL), worked on a legal engineering exercise to get the new pension scheme going. A contract between NSDL and the government was worked out, and the scheme was submitted to regulation by the PFRDA. After legal challenges were overcome, the government managed to get the law enacted in 2013.

Over the last few years, the number of subscribers to the New Pension Scheme or NPS has been increasing — many state government staffers are now part of it and, over a period of time, policymakers hope to see the impact of a credible pension framework rub off on the EPFO, which administers the country’s biggest pension scheme. But as the recent violent protests against the new rules restricting EPF withdrawals show, the going won’t be easy.

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