Side-stepping pension reforms

Our modest progress on pension reforms is as evident and unfortunate as it was avoidable. But it is not surprising. While we have admittedly gone some distance since 2004,its not far enough,as each bold step forward was followed by a series of quaint little half-hearted side-steps on implementation.

For example,we realised in 2003 that India can no longer afford the high social cost of civil service pension payments. In a series of remarkably bold and swift moves,and within a few months,the central government and 25 states changed their civil service pension rules. This effectively replaced the traditional,tax-financed civil service pension scheme by the contributions-based NPS. An undoubtedly huge step forward on pension reforms.

But then we followed this by slipping up on implementation. And today,seven years after the civil service NPS became effective,a handful of officers at PFRDA are busy making conservative investment decisions on behalf of the roughly 1.5 million civil servants who have since joined the NPS. By now,and as per original intent and design,each of these civil servants should have had an individual NPS account that accurately reflected their contributions,accumulations and investment returns,and gave each of them full freedom to select a product and fund manager for their retirement savings. It is ironic that the current NPS for civil servants has instead evolved into a system that looks very much like the EPFO where 50 PF trustees make conservative investment decisions for 20 million PF subscribers. For over half a decade,we have stood by and allowed the civil service NPS to grow into an important problem. We should have had clear timelines and pulled out the stops with co-ordinated action to fix this.

However,in August 2008,we side-stepped this problem and decided instead to extend the NPS to middle-income informal sector workers. After all,two consecutive national surveys in 2005 and 2007 had suggested a strong latent demand for an NPS-type product among roughly 10 crore young self-employed workers.

Within a few weeks of this government decision,the PFRDA had swung into action and appointed six extremely low-cost pension fund managers to invest the savings of crores of self-employed persons who would join this new citizens NPS. Immediately thereafter,nearly 30 of Indias largest banks and finance distributors were hired to deliver the NPS to the public and capture the huge latent demand.

But then we failed to follow through on proactively managing and carefully monitoring the rollout. In the following months,the citizens NPS seemed to drift along on auto-pilot. Efforts at locating the 10 crore interested workers spread across 3.3 million square km were led by a Rs 1 crore national publicity budget that lasted a couple of half-page ads,a somewhat simplistic assumption about commercial incentives,a limited understanding of the profile of latent demand and near-zero efforts on public awareness and education. Not surprisingly,after nearly 2 years,both progress and outlook remain somewhat grim. Barely 30,000 people have opened NPS accounts,although nearly 5,000 outlets offer the product.

At this stage,a useful strategy should have been to go into the field and meet distributor staff and NPS customers to get a direct,tangible insight into problems and solutions. Instead,PFRDA side-stepped the citizens NPS,set up an expert committee to figure out both questions and answers about the schemes future,and set out on an even more complex journeyto extend the NPS to 20 crore rickshaw pullers,head loaders,marginal farmers,street vendors and other daily wage earners through a third window named NPS-Lite.

As both political and public policy attractions of this new idea were fairly obvious,the government took yet another bold step forward in February 2010. It announced a Rs 100 crore budget to pay Rs 1,000 to each low-income worker who opened an NPS-Lite account in 2010-11. The PFRDA was expected to ensure that 10 lakh low-income workers would open NPS-Lite account by March 2011 and therefore benefit from the Swavalamban initiative.

At that stage,it may have been prudent for PFRDA to indulge in some introspection. This should have involved a few days in the trenches to carefully study the unique needs and constraints of low-income workers.

In parallel,it may have been useful for PFRDA to await its own committees guidance to know more precisely the shortcomings of the citizens NPS rollout so that past mistakes in design or implementation or both could be avoided.

Instead,the PFRDA and the government chose to direct their full energy and attention into getting the supply-side capacity for NPS-Lite and Swavalamban in place. A series of new,stringent regulations were immediately developed. And several credible agencies were quickly appointed to deliver Swavalamban to the poor. However,despite serious policy intent,non-trivial regulatory intervention,carefully crafted regulations and the attractive subsidy,barely 5,000 working poor have opened NPS-Lite accounts.

Today,as we simultaneously stand at the birth of a new year and on the brink of an old age poverty crisis,it is not clear whether we have any more leg room for side-steps. It is clear,however,that were rapidly running out of time. And while it may seem fine to let yet another year slip by,the cost of failure,or of a delayed success,is much more than we can bear.

For example,if a person at age 25 was delayed in joining the NPS by even one year,her retirement corpus,assuming that her monthly savings of Rs 1,000 earned 10 per year,would be reduced by roughly Rs 3,70,000. This is a significantly large adverse impact at the level of an individual NPS subscriber. If,on the other hand,five crore Indians aged 25 were delayed in joining the NPS by a year,they would collectively lose savings of a staggering Rs 18.5 lakh crore.

A useful 2011 resolution for the government would be to stop accepting delays or failure,to perhaps spend some time on a driving range. After all,in driving pension reforms,as with a golf ball,the trick is to keep your head down,your eye on the ball and to not forget to follow through.

The author is a co-promoter of Invest India Micro Pension Services