The coming month marks five years of the passage of the Pension Fund Regulatory Development Authority (PFRDA) Act, 2013, which set up the PFRDA as India’s pensions regulator. As the regulator in charge of overseeing the National Pension System (NPS) and India’s pensions sector, the PFRDA has come a long way to the present. Therefore, given the occasion, it is worth reflecting upon some of the gaps in India’s pension regulatory framework.

Setting up of the PFRDA

The interim PFRDA was established in 2003 to oversee the NPS, and regulate India’s pensions sector. Concerns of inadequate coverage and fiscal unsustainability of traditional civil-servant pensions had led to the NPS being introduced in 2003. The NPS was visualised as a defined-contribution pension scheme, with features including individual pension accounts, multiple pension funds and mandatory annuitisation at exit.

Initially covering only government employees, the NPS was extended to all citizens by 2009, barring members of the armed forces. Subsequent reforms have focused on encouraging India’s vast unorganised sector workforce to subscribe to the NPS, such as introducing a simpler variant of NPS, ‘NPS-Lite’ in 2010, the ‘Swavalamban’ scheme in 2010 where the government co-contributes to the pension corpus of unorganised sector workers not covered by social security schemes, and the ‘Atal Pension Yojana’ in 2015, where the government guarantees a minimum post-retirement monthly pension, as well as extends co-contribution benefits to unorganised sector workers.

The interim PFRDA transitioned into the PFRDA, and the NPS received formal legislative backing, with the PFRDA Act’s passage in September 2013. The PFRDA Act is the linchpin of India’s pension regulatory framework, being supplemented by regulations issued by the PFRDA, which regulate the functioning of key intermediaries under the NPS framework, such as the NPS Trust, Pension Funds and Points of Presence (PoPs). A recent report by the Vidhi Centre for Legal Policy, New Delhi discusses this regulatory framework in detail, pointing out issues and the way ahead.

A pervasive lack of clarity

A major theme in India’s pension regulatory framework is a pervasive lack of clarity.

For instance, while the PFRDA is the regulator of the pensions sector, it is also responsible for promoting and developing the NPS — a pension ‘product’. This gives rise to concerns of a potential conflict of interest, and requires a clearer delineation of the PFRDA’s role to encourage greater regulatory accountability.

A related issue concerns the NPS Trust’s role vis-à-vis the PFRDA. The NPS Trust is a critical intermediary in the NPS framework, which holds subscriber funds and assets in its custody, implements PFRDA’s regulations, supervises and monitors other intermediaries, while remaining under the PFRDA’s supervision. At present, the NPS Trust and the PFRDA possess overlapping and concurrent powers, in relation to inspecting other NPS intermediaries. Greater clarity in this regard would certainly be welcome.

The need for greater clarity also spills over to the PFRDA Act. For instance, the Act caps foreign shareholding in Indian pension funds to be the higher of 26 per cent of the pension fund’s paid-up capital or the limits specified for Indian insurance companies. Though, foreign shareholding limits for Indian insurance companies are currently 49 per cent, and foreign exchange regulations cap foreign shareholding in the pensions sector at 49 per cent, the language of the PFRDA Act which reflects dual percentages, creates avoidable confusion.

Consumer protection

Another major theme in India’s pension regulatory framework is an inadequate emphasis on consumer protection. For an issue as critical as financial consumer protection, especially when the NPS serves as a universal product securing citizens’ retiral incomes, some of these gaps are particularly troubling. For instance, the web-based grievance portal for NPS subscribers allows complaints to be registered only in English, while the Hindi version of the portal is dysfunctional.

In a nation as diverse as India with multiple languages, and especially for a flagship national pension product, having a functional grievance redress portal in English alone is a clear problem.

Similarly, the PFRDA (Redressal of Subscriber Grievance) Regulations, 2015 fail to specify clear grounds for approaching the office of the Ombudsman, who functions as the grievance redress authority. This contrasts with the mention of clear grounds for approaching the office of the Ombudsman operational under the regulatory ambit of SEBI and RBI, by aggrieved consumers.

Inadequate attention to consumer protection also reflects in the recent PFRDA (Points of Presence) Regulations, 2018. While the Regulations require PoPs, (who are intermediaries and help in on-boarding subscribers to the NPS) to maintain confidentiality of subscribers’ personal information, they fall short of detailing specific standards of care required of PoPs, or expressly penalising PoPs who fail in protecting confidentiality.

In today’s age, where protecting personal information is critical, the absence of such safeguards suggests that the realisation that protection of subscribers’ personal information is critical and non-negotiable, has not made much headway.

The road ahead

Anniversaries are occasions to reflect, take stock and prepare for the future. On PFRDA’s fifth anniversary, addressing these gaps and strengthening the underpinnings of India’s pensions framework should be a priority, for there can be no better way to mark the occasion than creating a robust regulatory framework which underpins sustainable retiral incomes of all Indians.

The writer is Research Fellow, Corporate Law and Financial Regulation at Vidhi Centre for Legal Policy, New Delhi

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