The government, the Pension Fund Regulatory and Development Authority, and civil society have to work in tandem to protect the common man from economic misery post his working life, says G N Bajpai
Indian society until a few decades ago had the inherent protection against old age under the shadow of the institution of joint/extended family. Urbanisation, growing standards of living, and changing social system have led to disintegration of country’s age-old social system into nuclear families — double income no kids and single income no kids.
The current social security system of the nation (both private and public sector) covers only a small proportion of the population engaged in organised employment. The self-employed and unorganised workers, including agricultural labour, have no economic security worth the name for their old age. The financial capacity of the Union and state governments is inadequate to accommodate any meaningful security against old age.
Even in the case of government employees — central, state and local bodies — with the change-over to funded ‘defined contribution’ (DC) from unfunded ‘defined benefit’ (DB) from October 1, 2002, the management of pension is becoming an area of concern. With ‘pay as you go’ DB schemes and decelerating population, even rich nations are finding it difficult to fund the social security system. The ‘hazard of living too long’ for India as a nation is looming large. The social disquiet, stemming out of economic deprivation, is today manifest in our younger generation but could envelope the entire society, if the misery caused by the longevity of life becomes more painful. Encouraging and facilitating voluntary effort seems to be the only remedy.
The Union government has been trying to promote self-contributed pension scheme (NPS) and has, pending approval of legislation by Parliament, set up a Pension Fund Regulatory and Development Authority (PFRDA), which has been functioning as an administrative body for over five years. However, it has not been able to make any headway with the existing panoply of challenges and the corpus under its management is a niggardly Rs 4,000 crore. It is said that over 98% of even this small fund belongs to DC schemes of the government employees. Penetration into the unorganised segment, for which this major initiative has been taken by the government, is almost negligible.
It would not be appropriate to blame PFRDA. There are challenges on the ground and have to be met with some innovative approaches. First, the challenge is to convince those who need insurance against the ‘hazard of living too long’. They have to be persuaded to sacrifice some part of current needs for a secured living tomorrow. Deficit domestic budgets of individuals make the shift daunting.
Financial literacy in India is abysmally low. The product to be marketed by PFRDA is a service and can only be experienced at a distant date, say some 20-40 years hence. Rampant financial illiteracy makes the business of selling financial instruments particularly, insurance and pensions, a ‘push business.’ It has to be marketed assiduously, which warrants persistent efforts. Any push product invariably has ingrained in it an amount of intermediation fees payable to the ‘pushers’ commensurate with efforts required. And the task cannot be organised on probono or voluntary basis. Even Union government’s announcement in the Budget for year 2010-11 to credit Rs1,000 to the new accounts opened after 1 April, 2010 has not generated enough encouragement to queue up. The nature of the pension scheme proposition itself leaves little room for PFRDA to compensate intermediaries for pushing the product.
CONVERSION of push product into ‘pull product’ requires visible demonstration of benefits. Such a demonstration emanates from the economic benefits; in this case the rate of returns, which are attractive enough to induce a prospective investor into joining the National Pension Scheme (NPS). However, this is something like a chicken and an egg story. Unless there is a demonstration of return, which is enabled by corpus (sizeable) managed well over a period of time, how can there be demonstration? And, unless the scheme gets going, how can a corpus be created? Some innovative approach of guaranteeing a return and/or other form of financial incentive has to be devised.
The prospects — target group to be covered under NPS — is not only large but is dispersed across the entire Indian geography. This requires creation of a network, which facilitates not only the approach — outreach — but a constant communication. This is another redoubtable challenge, which even some of the private sector organisations in the asset management industry (MF), with all the necessary enablers (including technology), are finding it difficult to manage successfully.
Yet another challenge (fundamental) is building of regulatory foundations, which will withstand the test of time with heterogeneous constituents — customers, depositories, intermediaries, and fund managers. Designing such a framework is an awesome task. Replication of framework from any of the jurisdictions from across continents may have to be customised so much that it may lose its original shape, because our society is complex — socially, economically, politically — and comprises rich and deprived, educated and illiterate, and riddled with traditions and complexities of family relationships.
The intermediaries — fund managers, depositories and distribution links — will be experimenting and innovating. The PFRDA may only be able to draw inspiration from the framework of other jurisdictions and will have to keep the blueprint on the drawing board continuously to refine the regulatory framework on an ongoing basis. The PFRDA will have to run, and not walk, on the learning curve as the challenge of providing cover against ‘hazard of living too long’ is not only mammoth and serious, but direly urgent.
The list of challenges is long and formidability is apparent. This makes the task of putting in place an acceptable, marketable and manageable scheme tough. The PFRDA, government and civil society have to work in tandem to prevent the economic miseries faced by the common man, post his working life.