The Hindu Business Line : A torn safety net

The Government does not tell anybody anything about the provident funds (defined contribution plans) that it runs and goes out of its way to obfuscate the fact that they are deeply in the red. The banks sell their shares to the public without mentioning the financial implications of their heavily under-funded pension plans while the SEBI looks on with its habitual air of confusion.

THERE is delicious irony in the prospect of the Indian middle-class, which had so enthusiastically supported economic liberalisation (or, more accurately, corporate liberalisation) merely because of a desire to acquire tawdry consumer products rejected by the developed markets, facing a bleak old age because of the lack of a social safety net so characteristic of the wackier market uber alles economies in general and the parlous state of the government and private pension plans this country in specific.

A leading business periodical has, in recent months, been running a series of excellent articles on what it calls "the ticking pension bomb" — but does not seem to have succeeded in evoking any discernable response from the government nor, for that matter, from the people whose future will most certainly be destroyed by the bomb.

It is a matter of no great surprise that the Central government, the constituent arties of which are currently wholly preoccupied with short-term, poll-related issues, has not thought it necessary to initiate proactive — or even reactive — measures to clean up the pension mess.

But it is surprising that the very people whose post-retirement prospects have been placed in jeopardy by the neglect of the pension sector have not thought it fit to agitate for an overhaul.

Take bank employees, for instance — an excitable lot when it comes to such issues as the stapling of currency notes, and so on. The financial periodical referred to above has reported that the Union Finance Ministry has, for all practical purposes, buried a report that it had asked the Indian Banks Association in 2002 to prepare on the under-funding of the pension plans of the banks.

This is, of course, to be expected as the shortfall in their employees' pension funds works out north of Rs 12,000 crore — over double the profits reported by all public sector banks in financial 2002!

One can only assume that bank employees — as also those working in other industries — are under the impression that the pawning of their future is pretty much inevitable if they want a liberalised economy and all the bells and whistles that go with it. But this perception has absolutely no basis in reality.

The fact of the matter is that the people of more advanced economies, while undoubtedly committed to the values of a free market, have been prudent enough not to throw themselves entirely at its mercy.

Take, for instance, the US — synonymous with every-man-for-himself capitalism. This muscular philosophy ends exactly where public interests begin.

Washington, alarmed by the twin phenomena of increasing longevity and declining birth rates, had, some time ago, decided that the government should have nothing to do with providing for the retirement of its citizens and had transferred this function to the corporate sector.

This was fine as America does not have the kind of problems that India has, and matters moved along merrily till the prolonged bear market in 2000, which brought down the value of the assets, primarily equity, held under corporate defined-benefit pension plans.

They ran into deficit, defined as the amount by which the value of a fund's assets fall short of the current value of the pensions that they are committed to pay in the future.

The difference between India and the US is that the latter had systems in place to track and fix problems, actual and putative. Thus, under the US Employment Retirement Income Security Act (ERISA) of 1974, a pension plan is categorised as under-funded if the market value of its assets falls below 90 per cent of its current liabilities.

If this happens, the deficits have to be made good, and are reflected in the concerned corporation's financials as what pension liabilities are: debt, pure and simple. This, in turn, will result in the corporation's share price racing south, investors heading north and credit rating agencies and investment analysts saying nasty things about the corporation.

America's accounting standards board, the Financial Accounting Standards Board (FASB), said early this year that it is planning to work on improvements in accounting for employee pension funds and that a standard on the subject will be enunciated next year.

The venerable Institute of Chartered Accountants of India (ICAI) is, undoubtedly, waiting for this standard with bated breath so that it can pinch it — about a decade after its publication in the US.

In this, as in most other matters, the UK decided to go along with the US. The British government too decided that it should not be in the business of managing pension funds and off-loaded it on corporations. But, then, the UK has lost no time in coming out with a new accounting standard, FRS17, which highlight deficits in companies' pension funds.

Quite simply, the standard compels companies to value their pension assets at current market prices and to deduct short-term deficits from profits. Fair enough.

Meanwhile, back in India, we have a government that does not tell anybody anything about the provident funds (defined contribution plans) that it runs and, in fact, goes out of its way to obfuscate the fact that they are deeply in the red.

Our banks sell their shares to the public without mentioning the financial implications of their heavily under-funded pension plans in their offer documents while the Securities and Exchange Board of India (SEBI) looks on with its habitual air of confusion.

And the Reserve Bank of India (RBI) is too obsessed with its own august position to get its hands dirty by taking apart the banking system and finding out its viability with its under-funded pensions vastly in excess of its profits.

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