Security at sunset

With MSMEs, start-ups and platform companies expanding India’s ranks of self-employed and gig workers, the new labour code and NITI Aayog are quite right to flag the need for a universal pension scheme for the informal workforce. Employees Provident Fund Organisation (EPFO) is said to have been tasked with devising a separate pension scheme for informal workers at its next meeting. While that’s an option, a better one would be to go back to the drawing board to design a voluntary pension scheme open to all workers. Employee Pension Scheme 1995 (EPS) managed by the EPFO, has been struggling to provide even a basic level of assured pension to its subscriber base. It has run up funding, operational and legal challenges, despite diverting 8.33 per cent of employers’ contributions towards pensions.

Learnings so far from operating the EPFO, EPS and National Pension System (NPS) suggest that a universal pension scheme needs to have the following features to remain viable and fulfil its mandate. One, the primary objective of the scheme should be to offer minimum guaranteed pensions indexed for inflation to informal sector employees below a certain income threshold. If the scheme is to be extended to formal sector employees in lieu of EPS, employee contributions must be supplemented by employers. Final pension payouts in such cases should be based on the available corpus. Shortfalls in the corpus of low-income subscribers at the time of retirement, can be met by the Centre. Given the variable incomes of informal workers, the scheme can allow for flexible timing of contributions in a year, but the emphasis must be on an early start (say before the age of 30), to ensure compounding. Early withdrawals or advances that deplete the corpus should be barred. Two, rather than adopt EPFO’s black box structure, it must have professional fund managers transparently investing in a mix of gilts, high-quality bonds and equity indices, for a low fee. NPS has generated 10-12 per cent returns from equities and 7-9 per cent from bonds, relying on this structure. Most Indian insurers offer deferred annuity products that guarantee lifelong pensions from limited premium payments, so generating running defined benefits from market investments is not such a tall ask. Three, the pension guarantee should be based on realistic return assumptions. Fund manager performance should be stringently evaluated. Once-a-year actuarial valuations must be undertaken to estimate the pension liability, so that the Centre can provision for it or contributions adjusted, over time.

Atal Pension Yojana (APY), the defined benefit scheme for informal sector workers launched in 2015 and managed by the NPS Trust, already has some of these features and has attracted over 4 crore subscribers. This open-to-all scheme requires subscribers to contribute modest sums of between ₹42 and ₹1,454 per month during their working life, for assured monthly pensions of ₹1,000 to ₹5,000 after 60. While the Centre was initially a co-contributor to the scheme, it has recently amended its terms to stop its contributions, undertaking to fund any shortfall at the time of the pension payout. APY can be a good starting point for the design of India’s new universal pension system.

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