Comment

The Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, was introduced in the Lok Sabha during the 2011 budget session, with the support of the BJP, the main opposition party.
Though the 2011 PFRDA Bill is largely similar to the 2005 Bill that lapsed in 2010, there are notable differences. First, the 2011 version uses more accurate term “National Pension System” instead of the “New Pension System”. This signifies that it is national in scope, encompassing not just those who have to compulsorily join it, but also those who may want to use its design and architecture voluntarily. This move gives Indian citizens more options to address their retirement income needs.
Second, the2011 version envisages the tax treatment of the NPS on par with other retirement products and organisations such as the EPFO (Employees Provident Fund Organisation).
Third, the current version separates the issue of FDI limits in pension fund management companies from the Bill.
Fourth, the 2011 Bill more clearly specifies the powers of the PFRDA to regulate superannuation schemes of corporations and of public sector organisations. This is a welcome move. Currently, superannuation schemes when introduced require permission of the Income Tax Department, but there is a little or no subsequent regulation. This gap needs to be urgently filled in view of greater dynamism and fluidity of business organisations. Sound supervision and governance structures, involving segregation of pension assets, and adequate funding based on transparent actuarial valuations, are also essential for retirement schemes of both public and private sector organisations.
Fifth, the option of investing in a fund comprising only government bonds is now explicitly stated.
Sixth, there is an explicit provision for subscriber education and a fund to protect members in case of default by fund managers, thus emphasising the developmental and social protection roles of the PFRDA. The educational role could be interpreted broadly to develop requisite manpower for the pension industry, so eventually India could begin to export pension services, widening its service export basket.
As the Standing Committee on Finance begins consideration of the Bill, there are several refinements of the National Pension System (NPS) which merits consideration. These refinements are designed to further improve design and architecture of the NPS which already incorporates insights from recent theoretical and empirical literature on pensions, and from international experiences with pension reform.
By end of March 2011, there were 1.7 million members registered under the NPS. Except for about 43,000 accounts, the rest were mandatory accounts, covering central and state governments, autonomous bodies, and public sector undertakings (PSUs). All but three states have adopted NPS, though not all states have decided to use the PFRDA’s NPS architecture.
The voluntary enrollment in the NPS is meagre considering the large proportion of India’s 500 million plus labour force which does not have formal employer-employee relationship, or who work in firms with less than 20 employees. Passing of the PFRDA Bill will provide a more conducive policy, governance and regulatory environment for voluntary long-term retirement savings through participation in the NPS.
The suggested refinements to the PFRDA Bill 2011 may be grouped as follows.
The pay-out phase
The provisions currently mandate that at age 60, the NPS members must compulsorily purchase annuity comprising at least 40% of the accumulated balances. This provision requires reconsideration due to the uncertainty about increasing longevity trends (with women increasingly living longer than men as indicated by the 2011 census); and with limited investment options for annuity suppliers, ie insurance companies, annuity markets have become even more difficult to organise.
The reconsideration could be along the following lines. First, the options for payout phase could be widened in terms of the age flexibility, and in terms of products designed to address longevity risk. Given that life expectancy at age 60 is currently around 16 years for men, and 18 years for women, and this will increase with improved living conditions, the fixed age of 60 at which pay out phase begins, does not provide choice to those who may wish to delay drawing down of the accumulated balances to a later date. Thus, it would be appropriate to indicate an upper age limit such as age 70, by which such a draw down should begin. This will also enable a member to benefit from the power of compound interest for a longer period.
The division of accumulated balances into lump sum (maximum 60%) and mandatory annuity (at least 40%) is too rigid to account for individual preferences and for severe constraints faced globally in developing the annuity markets. While annuity options could remain, a phased or programmed withdrawal option also merits inclusion.
Moreover, instead of mandating individual purchase of annuity, PFRDA should be empowered to negotiate group annuity options. There is considerable international research being undertaken on these issues, including appropriate risk sharing among stakeholders to address longevity risks.
The 2011 Bill should contain provisions for sharing surpluses generated by the PFRDA with the Consolidated Fund of India. In a recent report, the CAG (Comptroller and Auditor General of India) had found that several regulatory authorities, including the PFRDA, had not even deposited all the receipts with the Public Account thereby circumventing the government accounting and auditing provisions. While this aspect is addressed in the Bill, the potential of regulatory agencies such as the PFRDA to generate revenues also needs to be addressed.
In addition to pensions, there are also other retirement benefits such as gratuities, which represent long-term liabilities of the employers. The Bill could consider giving the PFRDA regulatory powers to ensure that actuarially sound funding provisions for meeting gratuity liabilities are instituted by the covered organisations.
If the Bill provides a choice to the members of the EPFO to voluntarily move to the NPS, it will merit consideration. This suggestion is consistent with economic theory, and with robust empirical research that contestability in delivery of public services has the potential to benefit the citizens and workers. A monopoly provider, such as the EPFO, has little incentive to improve quality and quantity of its services commensurate with the costs it imposes on the society. Those desiring improved EPFO services, including its management, should therefore welcome greater choice to members.
The PFRDA Bill 2011 is an essential institutional foundation for developing a robust integrated social security system in India. Its passage therefore is an urgent national priority.

The writer is a professor of public policy at the
National University of Singapore and can be reached at mukul.asher@gmail.com