A new era in pensions

After eight long years amidst much din and many walk-outs, the Government successfully got the Pension Fund Regulatory and Development Authority (PFRDA) Bill passed in both houses of Parliament.

The Bill gives authoritative status to the Pension Fund Regulatory and Development Authority, which was existing till date on an Ordinance passed in October 2003. Political objections to the Bill were on the pretext that the investment risk is entirely borne by the employees and there is no explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market-based guarantees.

NPS Scheme

The Bill formally changes the name of the New Pension System to the National Pension System (NPS). Under the NPS, every subscriber will have an individual pension account, which will be portable across job changes. The subscribers will get to choose fund managers and schemes to manage their pension wealth. They will also get to have the option of switching schemes and fund managers. The Bill — optional for those in the unorganised sector — provides a structure (NPS) to plan for old-age income security. The new law could help bring in new pension products in the market, thereby giving a choice to customers. Competition could also improve quality of service and returns. If these measures are successful, these could help mobilise substantial long-term funds, which can be used for development purposes.

It is expected that the proposed pension legislation will go a long way in enhancing pension cover and provide much-needed social security to the country's citizens — statistics state that only around 12 per cent of active workforce has any formal pension or social security plan. The Bill provides for market-based returns and wide coverage based on several investment options in the pension sector with an aim to building confidence in the subscribers. It will have provision for withdrawals for limited purposes from a Tier-I pension account — an incentive for subscribers to join the NPS.

The corpus of the NPS, with 52.83 lakh subscribers (including those of 26 State governments), was about Rs 35,000 crore. The Bill would also provide subscribers a wide choice to invest their funds for assured returns, like opting for government bonds as well as other funds, depending on their capacity to take risk. Till date, the contributions received under NPS are being kept in the Public Account of the Government. While a fixed return of 8 per cent per annum is given by the Union Government on total pension contributions, (both employee as well as the matching contribution by the Government), back-of-the-envelope calculations show that the actual return would have been much higher if the investment options proposed in the Bill now passed had been given to employees earlier.

Marketing potential

The PFRDA and their pension fund managers would have to do a lot of aggressive selling to turn the NPS into a success. The burgeoning Indian middle-class enjoys some sort of a safety net in the Provident Fund Scheme — even if they do find the PFRDA scheme attractive and put in their investible surplus after servicing their inevitable myriad loans, it would not be too high a figure.

The PFRDA should capture a market that has some investible surplus and does not have a well-defined pension scheme at present — the Indian agriculture sector. A well-defined product from a reputed pension fund that yields attractive returns could well be the game-changer that the PFRDA needs to undo a decade of inaction. If the returns are attractive under a flagship scheme, it would not take much time for the NPS to be considered an alternative to the staid yet complex Provident Fund scheme.

The PFRDA would also need to invest in technology to ensure that entry into the schemes, mid-term swaps between schemes, and exits are made easy and user-friendly, and returns from the various schemes are made transparent and visible to all.

(The author is Director, Finance, Ellucian.)

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