Bring back the regulator

The cut in the EPF rate to reduce interest subsidy is a step in the right direction. But it must be matched with policies to ensure that inflation and low interest rates are not allowed to squeeze the elderly. How can this be done? The EPFO is still in a UTI state of mind, where it is the regulator, fund manager, service provider and insurance company, all rolled into one. There is an urgent need to replace this structure by a modern pension system. The roles of servicing customers, managing portfolios, producing annuities, and regulation should all be transparently separated. Most importantly, the focus of the reforms should be on hundreds of millions of low income households, who are financially unsophisticated and can easily be charged usurious prices by clever finance companies.

Who can best do the job of regulating the EPFO and other pension funds? In the last few years there has been a detailed process of thinking about pension reforms, and putting a new structure in place. Building a modern pension system, spanning all its ramifications, and reaching out to hundreds of millions of households, is a difficult task. A decision to create a new pensions regulator was taken keeping in mind the objective of making a countrywide pension system that reaches out not only to civil servants but to unorganised industry, agricultural workers and the self-employed. A lazy choice could have been to use the insurance regulator, IRDA. But the vision of the insurance regulator only reaches the richest 5 per cent of the population. A pension system dominated by the goals of insurance companies will give lower returns to customers. Such a regulator would, correctly so, not be acceptable to labour unions. For each worker, a pension consists of 40 years of the 8220;accumulation phase8221; and 20 years of 8220;benefits8221;. The first 40 years have nothing to do with insurance. It was clear that IRDA could not serve the interests of dispersed, unorganised workers in agriculture or industry. For this reason, the Pensions Fund Regulatory Development Authority PFRDA was sought to be created.

But the ministry of finance has been fumbling on the job. New employees of the government have been put into the new pension system from January 2004. However, no effort has been made to implement the promised sleek, IT-intensive, competitive pension system. In fact, the new government has disbanded the interim pensions regulator. If the UPA is serious about its commitment to reforms with a human face, the finance minister should put the PFRDA back on the rails and speed up the implementation of the new pension system.