[In 2004, the
government introduced the National Pension System, or N.P.S. It marked a
radical transformation from the government’s benefits-based pension program to
one in which employees contribute toward their own retirement funds while
employed. The new system affects people employed in the federal government
after 2004, with the exception of India’s armed forces, who are part of a
separate pension system. State government employees in 27 out of 28 Indian
states have also been brought under its ambit, according to a government
release.]
 |
| Divyakant Solanki/European Pressphoto AgencyA government employee of the telegraph department at his workplace in Mumbai, Maharashtra, on July 15. |
Ashwini Kumar Sharma, 60, a data processing assistant with India’s
Ministry of Home Affairs, is about to retire after 41 years of working with the
government. After retirement, he will receive a monthly pension that will equal
half the last salary from his employer. He will get to withdraw the money that
a mandatory government program made him set aside during his working years,
along with the interest it accrued in a savings account.
Mr. Sharma will also
be given a certain sum, known as “gratuity”— a token of gratitude for decades
of service.
“Pension gives me a
sense of security,” said Mr. Sharma, who is retiring at the end of September.
“I am not worried about eating two square meals a day after I retire.”
He is one of India’s
estimated 90 million elderly, defined as those 60 years and older, according to
a United Nations report.
By 2050 that number is expected to rise to 315 million.
India does not have a
universal social security plan for its 1.2 billion people. The pension
system covers only about 12 percent of the working population, according
to India’s Ministry of Finance.
In 2004, the
government introduced the National Pension System, or N.P.S. It marked a
radical transformation from the government’s benefits-based pension program to
one in which employees contribute toward their own retirement funds while
employed. The new system affects people employed in the federal government
after 2004, with the exception of India’s armed forces, who are part of a
separate pension system. State government employees in 27 out of 28 Indian
states have also been brought under its ambit, according to a government
release.
A regulatory body
created in 2003 that manages the new retirement savings package will be given
legal status once India’s president signs into law a bill known as thePension Fund
Regulatory and Development Authority Bill, 2011. The Indian
Parliament approved the draft law earlier this month, after amending some
provisions of the existing bill, but its details are not
public.
The draft legislation
was aimed at reforming the pension sector, limiting government’s pension
liabilities in the long run and expanding the social security safety net for
the national population.
In the current
financial year, which begun in April and ends March 2014, the government has budgeted 30,000
crore, or 30 billion rupees ($473 million), for pensions and other retirement
benefits for employees who continue to be part of the old pension system, which
is indexed to inflation — the pension amount will increase whenever the
government revises salaries due to high inflation.
Foreign companies will
be allowed to hold up to a 26 percent stake in Indian businesses selling
pension products once the law goes into effect.
The new pension system
was extended to the non-government sector in 2009. Most companies in the
private sector with a staff of at least 20 people are required by law to
participate in a savings plan run by a government organization, known as the Employees’
Provident Fund Organization. Under this program, a small portion of an
employee’s salary with a matching contribution from the employer is put into a
pension plan and long-term savings that accrue interest, at a rate which is
revised by the government every year.
According to the statistics released
by the Indian ministry of labor and employment in 2011, 26 million people work
in the organized public and private sectors in India, while 433 million Indians
work in the unorganized sector, a figure that includes daily wage laborers and
workers at smaller businesses and a host of other jobs.
Since the informal
sector is loosely structured, the existing pension programs are not mandatory
for them, creating a need for reform.
“It was realized that
people in the unorganized sector did not think of pension savings,” said Ashvin
Parekh, a senior expert adviser at Ernst & Young consulting firm in Mumbai,
Maharashtra, explaining that now they can voluntarily participate in the new
pension system.
Keshav Sharma, 28,
followed in the footsteps of his father, Ashwini Kumar Sharma, by taking a job
with the Indian government after Keshav left his job at a privately-run IT
start up.
“The government job
offers better security,” said the younger Mr. Sharma, who now works as an
assistant section officer in India’s Ministry of Defense.
Yet he was unsure of
the merits of the government’s new pension program. The younger Mr. Sharma
contributes 10 percent of a portion of his monthly salary; his employer makes
an equal contribution. The aggregated amount is put into a pension account and
invested in market-driven pension products sold by three public sector
financial institutions chosen by the Pension Fund Regulatory and Development
Authority, or PFRDA. A total of eight companies, including five from the
private sector, have been enlisted as fund managers by the pension regulator.
“I keep asking myself
whether this plan is a good or a bad thing for us,” he said. “It is a
market-driven program. I don’t know how much I will get on my retirement.”
Every month, money
gets deducted from a government employee’s salary and designated financial
institutions then invest the funds in equities, government securities and debt
including corporate bonds. They invest the money on the employees’ behalf under
rules established by the regulator.
“We are not consulted
before our money is invested,” the younger Mr. Sharma said.
An employee of LIC
Pension Fund Limited, who was not authorized to speak to the media, said the
savings of government workers are divided between the LIC, SBI Pension Funds
Private Limited and UTI Retirement Solutions Limited.
“The funds are routed
through an authorized bank to each of these companies, which handles a corpus
of funds, not individual accounts.” The money is then invested according to the
PFRDA guidelines, the employee said.
Every person signed up
for the new pension program is given a “permanent retirement account number”
that can be used to track the investments and the interest and other earnings
from the money. Mr. Sharma said that at present, the online account does not
allow a government employee to switch to a different pension product or change
a fund manager.
“What if a company our
money is being invested in goes bankrupt?,” he asked. “We will lose all our
savings.”
Officials acknowledge
that there are always inherent risks to investing in such funds.
“The basic axiom for
investment is no risk, no gain,” said Yogesh Agarwal, the chairman of the
PFRDA.
Mr. Agarwal is
convinced that once the pension draft legislation is signed into law, it will
ameliorate the anxieties about the National Pension System.
“It will instill
confidence in people about the pension product, and ensure superior return on
investments,” he said.
The PFRDA touts the
National Pension System as the cheapest pension product in India offering high
returns. In the financial year that ended March, the returns on the plans
offered under this program ranged between 12 to 14 percent, Mr. Agarwal said.
A minimum annual
contribution of 6,000 rupees, or $95, is required to keep the pension account
open, and it is portable across jobs. On retirement, 60 percent of the money
can be withdrawn and the remaining 40 percent has to be reinvested in life
insurance products sold by companies authorized by the PFRDA. If someone makes
withdrawals before reaching age 60, only 20 percent of the savings can be taken
out, although the recent amendments in the draft legislation made a push for
that percentage to go up to 25.
The regulator has
registered 5.2 million subscribers and accumulated almost 35,000 crore, or 35
billion rupees ($552 million) in contributions since 2004, according tofigures released in
August.
Mr. Agarwal of PFRDA
said that in the old defined benefits system, government employees are paid
through the current year’s government revenue, a fiscally dangerous practice.
The defined contributions system allows the government to rectify its mistake
of “funding its own liability,” he said.
Even with the
introduction of the new law, the government will not be able to offset its
pension liability for at least the next few decades, experts say.
“The idea of pension
is to reduce uncertainty, vulnerability and poverty in old age,” said Mukesh
Anand, an assistant professor at the National Institute of Public Finance and
Policy in New Delhi. “But the new bill doesn’t address the core
objectives of pension.”
He added that the
government was trying to shift the burden of paying for pensions from the
public system to the individual.
The new pension
package, which the government is trying to sell to the non-government sector,
faces stiff competition from other pension products already available in the
market. Mr. Parekh of Ernst & Young estimates it to be a $7 billion market.
He described the National Pension System as the cheapest product available, but
said that it is the returns that matter and not the cost.
“There are 38-40 other
financial instruments available in the market, the N.P.S. does not compare too
well with them,” he said referring to other investment options.
Pointing to one of the
shortcomings of the new pension system, he said, “The architecture is all
wrong. The beneficiary is so remote from fund managers.”
Mr. Parekh expects the
pension sector to grow substantially as the life expectancy of Indians
increases.
“Rising income levels
will lead people to think: ‘If I were to live longer, what will become of me,’”
he said.