Dear Comrade Prakash, help pension reform & NPS if you wish to help poor in their old age

India is a country of 1,070 million people. Today a large part of it is young. However, this young country is soon catching up with the old. Only about 12 per cent of India is covered by a ‘pension plan’—the rest will have to continue to devise their own means to provide for the 20 years they are going to live as old people as these are in the informal sector. A lot of these people are not poor today, but there is a good chance that old age might drag them into poverty. A lot of these people will have to work till they die or, more correctly, die because they cannot work any longer. The goal of public policy, therefore, should be to encourage India to start saving for rainy days, to channel savings while young so as to finance consumption in old age.

The people of India do not want a dole from the government. The people of India want to stand on their own feet in old age, with control of their own pension assets giving them confidence. Our focus should be on empowerment, not welfare. We should turn away from Statist ‘‘welfare’’ solutions, which use the government to give out dole, towards new ways of harnessing the savings of poor people, and empowering them.

A large part of India can only save small amounts and sometimes sporadically. What we need is a collection mechanism that will accept small value transactions and keep them safely till such time we withdraw from the workforce. The present financial systems in India do not offer such an alternative. At the one end is the EPFO which offers a provident fund only to a few select categories of workers and at the other end are mutual funds and insurance plans which have no place for small value cheques.

India is spread across 3.3 million sq km. What we need is a national system that offers equal access to all its citizens, that does not deny entry on account of geography or occupation.

India has a heterogenous population—one that varies with their needs, wants and risk appetites. Keeping everyone in the system in the same investment plan therefore is not a promising proposition. Choice of investments should be a fundamental right of the contributor and very few schemes in India address this concern. At the same time, one must accommodate the large numbers of financially illiterate workers who may not be able to make a choice at the outset. While providing access and choice, we need a system that is sustainable, that does not induce fiscal stress. A pension system which will be bankrupt in the future is not credible in the eyes of workers. While the PPF might provide access and may look the most credible in the eyes of the workers today, it will not be entirely incorrect to raise questions about the funding and sustainability of the PPF in the decades to come.

The NPS will for the first time in India, offer a means of old-age saving for poor informal sector workers. While it is very tempting to allow withdrawals to finance urgent pressing needs, the point of a pension system is to provide for old age and must be adhered to. The NPS does well to prohibit withdrawals from the corpus meant for old age.

The NPS will not discriminate against one worker because of her occupation or the region she lives in. No other system in India offers this equality across regions at the moment. The coverage of EPFO is highly skewed towards the prosperous states. The workers in the informal sector in the less prosperous states are left out. For example, the EPFO covers only 0.56 per cent of the population in the North-East, 0.34 per cent of the population of Bihar or 1.87 per cent of the population of Orissa.

The NPS offers a choice between fund managers and schemes accommodating people with various risk appetites. For workers who cannot choose, the NPS offers a ‘pre-set’ option that will automatically put people in the lowest risk scheme. A worker will not be tied to any investment choice or fund manager and will have full freedom to choose a scheme with a conservative portfolio and a PSU fund manager if she wishes.

The NPS will ensure security of savings by adopting a trust structure where the Government, the fund manager or the employer will have no control or rights on the workers’ pension savings and bankruptcy of the fund manager or the employer would not have any impact on the savings. There have been many instances of defaults by employers in India where old people have spent many years in high courts fighting for what is rightfully theirs. The NPS insulates the worker from this risk.

By bringing the civil servants and the rest of India as part of one system, the Government of India will for once be moving away from a policy of exclusion towards equality. By doing so it will also reduce the fiscal stress on account of civil servants’ pensions today and avert the fiscal crisis that might occur some decades away if India ends up with a large mass of the elderly poor requiring social assistance.

I, therefore, ask you to support the new pension system and help India build credible and sustainable old age security for its population.

(Jayashree Vyas is MD of Sewa Bank)