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There are indications that in both the current schemes, there is scope for much greater efficiency in record-keeping operations and in undertaking member communications more effectively.

Second, in savings-based micro-pension schemes, investment, macroeconomic and other risks are borne by the individual. Risk-sharing arrangements have therefore been often advocated.

Some have argued for co-contributions by the government at the accumulation stage for participants in micro-pensions. Other options include risk sharing by the society (through government) at the pay-out phase. These could be in the form of special bonds or bank deposits with higher interest rates for senior citizens (with a cap on total investment) which vary according to market interest rates on long-term government bonds. This can be combined with well-targeted and reasonably funded old age assistance schemes financed from general budgetary revenue.

More research is needed in the Indian context before designing risk-sharing options. In particular, political economy considerations, where populist policies could trump financial and economic sustainability, should play an important role in design of such options. It would appear that co-contributions by the government at the accumulation stage may be particularly vulnerable to dysfunctional populist policies.

Third, arrangements during the pay-out phase need to be carefully considered while 40% lump-sum withdrawal of the accumulated funds appears realistic. The mandating of annuities, however, requires reconsideration. This is because the annuity markets are likely to be priced very conservatively, and product choices will remain limited, in the absence of long term assets required to match long term liabilities of annuities. A phased withdrawal scheme, linked to tax-advantaged senior citizen deposit or bond, merits consideration.

Fourth, micro-pensions represent a long-term financial contract, with potential for significant agency problems, and systemic risk to the financial system.

There is, therefore, a strong case for regulating micro-pension. Pension Fund Regulatory and Development Authority (PFRDA) should consider forming a separate division for micro-pension, and closely coordinate with SEBI, IRDA and NABARD. These regulators, along with RBI and the Ministry of Finance, should ensure financial stability by minimising systemic risk, and make progress towards financial inclusion goals.

Combined efforts of social entrepreneurs, financial institutions, the research community, and policymakers can help meet these challenges; and enable micro-pensions to play a useful, though relatively limited, role of social security.

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