In the last two years, the Government has introduced several new programmes, some of which are variations of earlier schemes. One such is the Atal Pension Yojana (APY), which was earlier called Swavalamban Yojana NPS (National Pension Scheme) Lite. The APY was introduced in 2015 for unorganised sector workers who do not have sufficient and reliable old age security.

The scheme encourages unorganised workers to make regular small savings during their working years towards pension benefits later. This is an important policy shift away from social assistance schemes to contributory schemes.

Design features APY clearly spells out end benefits of the pension scheme. Monthly pension ranging from ₹1,000 to ₹5000 is guaranteed upon retirement if subscribers contribute the prescribed amount for at least 20 years. This is an improvement over NPS-Lite where the pension amount was uncertain.

The Government provides co-contribution as incentive for five years to poor, unorganised workers not covered by formal social security schemes. APY is a public scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The key functions of record keeping, administration and customer service are performed by National Securities Depository Limited. A Permanent Retirement Account Number (PRAN) is assigned to all subscribers.

The scheme is tied to the broader mission of financial inclusion under the Pradhan Mantri Jan Dhan Yojana by using banks as intermediaries for promoting, administering and extending pension benefits to low income workers. With greater emphasis on e-governance, the scheme seeks to use mobile SMS reminders/alerts, electronic KYC-based registration and online exit, withdrawal, claims settlement processes to overcome last mile challenges and simplify the experience.

Official statistics show that by March 2016 the scheme had registered 371 banks (public and private sector , RRBs, cooperatives,etc), enrolled 24.60 lakh subscribers, and was managing ₹506 crore of assets. The scheme registered the highest month-on-month subscriber growth (13.55 per cent) and asset growth (26.18 per cent) among all pension schemes in March 2016. However, unorganised workers covered by it are barely 1 per cent.

Slow to catch onStringent default penalties are a major impediment . If a subscriber misses six consecutive contributions, the account is frozen, after 12 months it is deactivated and beyond 24 months the account is permanently closed. Considering that APY is meant for unorganised workers with irregular income streams, this feature reduces the scheme’s effectiveness.

Limited government co-contribution : Although co-contribution has been extended to 2019-2020, this could be availed of only by those joining before March 31, 2016. Given that the coverage of the scheme is less than 1 per cent, many unorganised workers joining the scheme in future cannot access it.

Poor agent incentives : Banks are asked to administer APY so that new bank accounts opened under PMJDY could be used for promoting the scheme as well as expanding financial inclusion among the economically excluded.

However, this will come in the way of the rural poor accessing the scheme due to low financial inclusion and low penetration of bank branches in rural areas. Moreover, incentives to banks are considerably lower than those provided in previous schemes since incentives have to be mutually negotiated, and shared between banks and business correspondents.

Lower flexibility in exit and withdrawal : The exit process is rigid as the scheme permits premature withdrawals only in the event of death of the beneficiary or her/his being afflicted by a terminal disease. Subsequently, the exit option was given to the beneficiary if she/he gave up the government’s contribution and interest earned on his/her contributions. Considering that poor unorganised workers are highly vulnerable to workplace injuries, accidents and disability, this reduces the reach of the scheme.

Suggestions for improvementRemove account closure for defaults : In the event of sustained non-payment, there can be a system by which subscribers are no longer entitled to a fixed monthly pension on retirement as per APY but can continue making suitable contributions to the APY account at his/her discretion to get different returns. At retirement, 40 per cent of the accumulated corpus can be converted into an annuity and the rest can be offered as a lumpsum.

Encourage mobile money payments : APY hopes to leverage PMJDY’s success to expand its coverage among low income workers. However, according to the RBI, while PMJDY has increased account density among underserved communities, account usage is low with nearly 35 per cent of such bank accounts having zero balance. This calls for the deployment of low cost and flexible mobile money channels, which is a newly emerging technology, to improve last mile access to banks for the rural poor.

Ease of premature exits and withdrawals : APY should provide for partial withdrawal of the corpus in an emergency after a reasonable lock-in period of 5 or 10 years. Public Provident Fund schemes have a 15-year lock-in period prior to full withdrawal and allow 50 per cent withdrawal at the end of the sixth year. APY should introduce similar flexibility.

Enhance behavioural interventions : Behavioural interventions or ‘nudges’ have of late attracted significant attention as low cost policy tools to elicit desired savings behaviour. Studies around the world show that nudges such as peer comparison, commitment devices, goal-setting calendars and personalisation are effective in overcoming self-control issues and prompting regular savings. Although APY has incorporated SMS reminders and auto-debit facility, scope for embedding behavioural interventions into the APY design still exists.

These improvements are urgently needed to improve the coverage of unorganised workers and enhance old age security among them.

Rajasekhar is a professor and Manjula a research officer at the Centre for Decentralization and Development, Institute for Social and Economic Change, Bengaluru. Kesavan is a founding trustee of Crosslinks Foundation, Bengaluru