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The pension system imperative

Thursday, 25 January 2007 - 1:18am IST

Sequential, but consistent, reforms over a considerable period will be needed

As fuller details of the interim investment patterns, recordkeeping, and other arrangements for the central government’s New Pension System (NPS) are awaited, it may be time to reflect on reforms needed to establish a modern pension system. The current demographic trends, reflected in the rising share of the working age to the population ratio, give a short breathing space of two decades to tackle the challenges of India becoming old before it becomes rich.

In 2006, India had 90 million persons above 60 years of age, but this will increase to 200 million by 2030, and 329 million by 2050.  Each person will also be living longer, requiring support for more years. Addressing such a huge challenge requires continued focus on enhancing India’s financial, economic, fiscal, institutional, and organisational capacities in both the private and the public sectors. It also requires that the country’s energies being channellised into raising the core long-term real growth rate to 8-10% per annum by addressing primarily internal constraints on growth.

Sequential, but consistent, reforms over a considerable period will therefore be needed. Competence and fiduciary responsibility must be the hallmark of those designing, managing, administering, and supervising or regulating various provident and pension fund organisations in the country. This column focuses on the reforms relating to NPS and the Pension Fund Regulatory and Development Authority (PFRDA). The opportunity cost of the three-year delay, which has already occurred since the announcement of the NPS in January 2004, has already cost the members and the country dear. Therefore, the first priority of the central government should be to announce the promised details of the interim arrangements as soon as possible, and then to ensure that they are implemented with a high degree of professionalism. Whatever the details, it will require strengthening the resources and capacities of the interim PFRDA. 

The PFRDA must have the flexibility to access advice from the experts in administration, technology, and other areas.  It is evident that, in many areas, availability of world-class expertise within the country is not being reflected in design and implementation of public policies. As the interim arrangements for the NPS for the central government employees begin to be implemented, this will provide the 19 states which have notified the NPS (more may join later as happened when value added tax was first introduced) to begin to implement the scheme as well.

The second step is to ensure that the NPS at the Centre and in the states are broadly (but not necessarily in every design detail) compatible.  The states are able to access the Central Recordkeeping Agency (CRA) of the Centre, if they choose to ensure economies of scale, which are substantial in recordkeeping, and are regulated by the PFRDA. This is because the setting up of a separate pension regulator in each state will be counter-productive.  Even with a single regulator, PFRDA will need to closely liaise with the Insurance Regulatory and Development Authority  (IRDA) as only insurance companies are permitted to provide annuities in the pay-out phase.

PFRDA will also have to liaise with the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI), which has the responsibility for the financial stability, an increasingly complex task in the globalised world, and the ministry of finance. The third step is to ensure that the PFRDA Bill, which reflects sound design and lessons of accumulated experiences and analytical literature, is passed by parliament expeditiously.  This will enable the NPS to be accessed by the self-employed and others who realise the need for long-term pension savings, but would like to have a pension system in which they have a high degree of confidence.

Some private research firms put the number of such potential members at around 80 million.  If each member has an average family size of 3.5, this would mean a degree of pension security for 280 million people. Such a Bill will also permit better supervision and regulation of micro-pension funds, which are increasingly being introduced and have the potential to cover around 2 million members in the next few years. Many of the members of micro-pension funds will be from the lower income groups.

Such a Bill will also permit the superannuation plans to be more effectively governed and supervised in both the public and private sectors. There is, therefore, considerable merit in the view that a badly designed PFRDA Bill, which does not enable scaleable and a modern pension system to develop, may be worse than no bill at all.  The UPA government has one more opportunity to demonstrate that those who are wedded to the outdated dogma of the past, and who lack understanding of the subtleties and the long-term nature of the pension system are not permitted to obstruct the establishment of a modern pension system in India.


(The writer is professor of public policy, National University of Singapore)

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