If the new pension scheme delivers on its promises, you can look forward to a happy and prosperous retired life. It’s the biggest weapon in grandpa’s armoury, and he can use it to telling effect every time a grandchild taunts him about his “fusty old government job”, so unlike the great opportunity, good money, and better working conditions in the private sector. His response: “Pension milti hai kya?” And that’s unanswerable. Government employees get a pension that is roughly equal to half their last drawn salary. They don’t make any contributions to this during their working life, and get this pension right till their death.Unfortunately, most of us cannot boast of such benevolent employers. Nothing, but nothing, in the private sector comes even close. Today, about 90 per cent of the workforce, including the self-employed, is not part of any pension scheme. The vast majority banks on children and relatives to see them through their retired life.Saving for retirementIn stark contrast to the big changes sweeping the rest of the financial world, there’s been little reform in the pensions space. You may think the EPF (Employee’s Provident Fund) is the answer. Sadly, it isn’t. For one, barely 4 per cent of the workforce has such an account. Two, the EPF is primarily a savings plan, not a pension scheme. The objective of setting up the fund was to encourage people in the organised sector to build up savings for their old age. But members withdraw their savings when they change jobs, rather than accumulating it for retirement. Some 90 per cent of the cases of final settlement in the EPF are of those changing jobs; only 10 per cent are superannuation cases. In 2004, about 93 per cent of EPF members had a balance of below Rs 50,000, and 85 per cent had less than Rs 20,000. Clearly, the EPF will not fund your retirement unless you are disciplined.“A vast majority of the retired still depend on informal support systems like the traditional joint family system and children. These traditional support systems are fading away. There is, therefore, a need to put in place a pension scheme that will provide reasonable income after retirement,” says Dhirendra Swarup, chairman, Pension Fund Regulatory and Development Authority (PFRDA). Which is why the PFRDA is now putting together a new pension system, which will be open to all, and which will not depend on government largesse. Today, about 90 per cent of the workforce, including the self-employed, is not part of any pension scheme. What it’s aboutThe new pension system will be based on defined contributions and will use the existing network of bank branches and post offices, among other intermediaries, to collect contributions from individuals. “It will provide a sound platform for individuals to gain financial independence after retirement,” says Swarup.The scheme will offer a basket of portfolios, which cover the spectrum of risk and return. This will include equity, the most powerful asset class for wealth creation. And, unlike most pension schemes today, the new scheme will offer choice. Investors will be given simple and lucid performance information, which will allow them to make informed choices about where to invest. Says Swarup: “It will allow investors to choose among fund managers, and select an asset mix that best suits their risk profile.”Essentially, the new scheme will be far more investor-friendly. Centralised record-keeping will ensure smooth transfer of benefits when there’s a change in employment. Adds Swarup: “Subscribers will be able to check the value of their corpus and where it is invested on a regular basis, perhaps daily, which is not possible at this point.” The new pension scheme promises choice, convenience and control. But remember, you must have the discipline to start early and save regularly. If you haven’t already, start now, and you can put your feet up and actually enjoy your retirement.with Monika Halan
