Pension plan

India’s pension reforms took an important step forward, with a shift in the stance of the Left parties — away from ideological hostility towards the idea of pension reforms, to a discussion about the details of the Pensions Fund Regulatory and Development Authority (PFRDA) Bill. The traditional “defined benefit” pension has run into trouble worldwide. Governments and companies have backed away from extravagant promises, thus showing that the benefit was not so “defined” after all. This has been replaced by a more meaningful focus on building up pension wealth through a life time of saving. This is in the best interest of workers, particularly because it allows them to switch jobs when better opportunities arise.

Early efforts at pension reforms internationally—some 20 years ago—ran into trouble with high fees and expenses being paid to finance companies. The Indian New Pension System (NPS) design attempts to control these costs, and bring greater competition to bear on the processes of handling pensions so as to bring down the prices paid by participants. The issues of design, awareness and education, fee and expenses and reach need to be discussed extensively in the PFRDA Bill so that NPS is made accessible to all Indians — farmers, unorganised sector workers, self-employed — and not just civil servants and the organised sector as the current pension system is. India is the last major country to experience the demographic transition. The country immediately in front of us in the queue — China — has encountered huge problems on this front because of a combination of defined benefit pensions and the one-child policy which engendered a prematurely aging population. China is now trying to move towards defined contributions and private pension fund managers but these moves may just be too late, given an aging society.

Let’s learn from this. India now has a last chance to establish sound systems whereby today’s young are placed in a modern pension system, where personal wealth is built up for them and which will prove a support structure in old age. Now is the right time to make this intervention. The UPA has done well to come closer to enacting the PFRDA legislation, finally.