The New Pension Scheme (NPS), the government of India’s flagship pension scheme, has been subject to a number of important reforms in recent times. This is a welcome change from the norm wherein the government’s and the regulators’ interest in pension products is passing at best. The Pension Fund Regulatory and Development Authority (PFRDA) is all set to raise the equity investment cap on the NPS in the private sector from 50 percent to 75 percent. The PFRDA has also changed the terms of premature withdrawal, allowing it for acquiring higher professional and technical qualifications, and for setting up a new business. The increase of the equity cap is an especially welcome move, considering that the earlier limits have been considered to be notoriously conservative, even by the standards of developing countries. As far back as 2013, an expert committee set up by the PFRDA had recommended that non-government members of NPS should have the option to invest 100 percent of their savings in equity savings. The raising of the cap brings India much closer to global counterparts. 

 

While the recent changes in NPS are welcome, there are several other areas in the pensions framework which require the attention of the government and the regulators. The Asian Development Bank, which is arguably one of the most important development partners in the Asia Pacific region, has pointed to the importance of pensions in developing countries like India. There are a number of other areas in the pensions sector which require significant improvements. These suggested reforms also formed part of a report on pensions on India which was published earlier this year by Vidhi Centre for Legal Policy. 

 

Pensions in the unorganised sector: One of the most pressing areas of reform lies in the unorganised sector, which comprises almost 83 percent of the workforce, while contributing nearly half to the GDP. The elderly population itself is a heterogeneous group, with some members like those who are employed in the unorganised sector, and those who lack financial literacy and sophistication. A significant portion of this demographic lives below the poverty line. Members of this group are also characterised by a number of factors, which distinguish them from their “formally” employed counterparts such as unpredictable and/or seasonal employment, lack of a safety net, unreliable and seasonal incomes, etc. These factors leave them tremendously susceptible to negative aftermaths arising out of various exigencies like illness and accidents. This causes an overall negative impact on their financial well-being. 

 

The Atal Pension Yojana (APY) is the only formal pension scheme which caters to this portion of the population. The predecessor of the APY, the NPS Lite, was launched with a lot of fanfare in 2010 and was touted as a low-cost pension scheme for the unorganised sector. It was subsequently revamped as the APY. Its uptake has been anything but encouraging. As of January 2018, the number of its subscribers is 80 lakh. While this is an improvement of the previous year’s figures of 70 lakh, it barely scratches the surface of number of people who most need this type of social security.  

 

The genesis of a specific pension scheme for the unorganised sector lies in the Unorganised Workers Social Security Act, which was enacted in 2008. Subsequently, the NPS Lite/ Swavalamban scheme was launched in 2010 with the aim of enabling people belonging to low income groups to plan for their retirement even with small investment amounts of Rs 100 per month. While the Swavalamban scheme provided for market-linked results, at par with the NPS, the APY provides for pre-decided pension amounts ranging from Rs 1,000 to Rs 5,000 depending on the quantum of their investment. While the APY provides for a government co-contribution up to 50 percent of the amount or Rs 1,000, whichever is lower, there is no accounting for the realities of inflation and indexation for the same. While recent reports have indicated that the government is thinking of increasing the pension payable to Rs 10,000, there is no provision for inflation indexation, or of giving subscribers the benefit of lucrative market-based returns. Similarly, the Swavalamban scheme was designed for workers in the age group of 18-60. Interestingly, upon revamping of Swavalamban as APY, only subscribers from the 18-40 age group were given the option to migrate to APY. There is no seeming rationale for such an absolute prescriptive age. 

 

As identified in the Vidhi Centre report, one of the biggest problem areas which has led to the disappointing number of enrollments in the APY is the presence of a large number of barriers to entry and the absence of incentives to enroll. Even if these barriers are not always literal, presence of artificial barriers like extensive paperwork, requirement for an Aadhaar card, bureaucratic impediments, penalties and fees for delayed contributory payments enhance the perception of inaccessibility. The Reserve Bank of India’s Household Finance Committee Report has also stressed upon the need to eliminate these informal transactional costs when it comes to providing financial services. 

 

Consumer protection: There is a mostly overarching consensus by now that consumer protection is a critical component of the financial services industry. Because of the unique vulnerabilities involved in this space, a number of expert bodies, notably the Bose committee, have called for a shifting of the standard from the existing ‘buyer beware’ to ‘seller beware’. The idea is that in the case of financial products, the service providers are in a position to maximise their gains at the cost of selling unsuitable products to the consumers. In the absence of a unified financial consumer redressal authority, the onus is on the respective regulators, or the PFRDA in this case, to step in and offer more enhanced protection to pension subscribers. 

 

The golden standard in this regard is the guideline provided by the seminal Financial Sector Legislative Reform Commission: “An enumerated set of rights and protections for consumers, an enumerated set of powers in the hands of the regulator, and principles that guide what power should be used under what circumstances.” Consumer protection should be coupled with consumer education, and a comprehensive mechanism should extend to not only the actual transaction of availing of a particular service, but also the stages before and after the mere transaction. Pension service providers and the related intermediaries are repositories of not just the hard-earned life savings, but also the faith of millions of citizens in their sunset years. The recently released Srikrishna Committee Report also provides important guidance on the processing of sensitive financial data, especially in relation with explicit informed consent and the “clear, specific and lawful” requirement of personal information”. 

 

Foreign direct investment in pensions: India has always been notoriously guarded when it comes to foreign investment. Therefore, it came as a notable move when the finance minister in his 2016 budget speech allowed partial FDI in pensions, and a number of other social sectors such as insurance, asset reconstruction, and stock exchanges. Consequently, the maximum permissible FDI was increased to 49 percent in both the pensions and the insurance sector. FDI is regarded as an important source of capital for growth in developing countries. The efficacy of institutional support in social sector areas such as pensions, insurance has also been recognised. However, this has not yet translated into any tangible actions, and no commensurate amendment has been made yet in the PFRDA Act or its regulations. In contrast, the government’s attitude to FDI in the insurance sector has been a lot more enthusiastic, even considering raising the cap to 100 percent for the insurance sector. Considering the importance of pensions as a product and the lack in uptake, focusing attention on FDI in this sector can reap rich dividends in the coming years.  

 

Micro pensions: By doing away with the formal and often rigid system of traditional pensions services, micro pensions offer a viable alternative for social security, especially in the context of the unorganised sector in India. However, micro pensions are also tasked with maintaining a balance between being financially sustainable in the longer term, offering attractive returns, and being held to a standard of accountability. Micro pensions have been offered with success in Bangladesh by Grameen Bank and the National Pension Commission of Nigeria recently introduced draft guidelines for micro pensions. At present, there is no governing legislation for the regulation of microfinance in India though the Micro Finance Institutions (Development and Regulation) Bill, 2012 (‘MFI Bill’) – which has since lapsed – was an attempt at regulating the sector, and also extended its scope to pension services. The bill was rejected by the standing committee of parliament in 2014, making it the second time in six years to be relegated to the archives. Worryingly, the microfinance sector has also been besieged by a number of frauds and mismanagement. Therefore, this is an area which needs the urgent intervention of the regulators to set up clear and unambiguous legal and regulatory framework.

 

Though pensions may not be the most glamorous pension product, their importance can scarcely be overstated. While India has one of the youngest (median) populations globally and this is considered one of the nation’s biggest assets, the fact that India has a rapidly increasing elder population often gets ignored. This requires targeted interventions on behalf of the regulators and the government. According to a Government of India report, India’s elderly population will comprise 15 percent of the population by 2050. Further, the report of the Household Finance Committee showed that only a small component of this cohort is adequately prepared for retirement. Many members of this group show apprehension in approaching the financial system. Factors like increasing life expectancies and breakdown of hitherto traditional means of support such as the joint family have left the elderly population vulnerable to several exigencies. Not only is the lack of a safety net burdensome for the individuals, it also gives rise to the likelihood of a huge fiscal burden for the government and further perpetuates the cycle of inter-generational debt. 

 

Financial inclusion in India is unfortunately still a distant reality for most people. As per the Household Finance Committee Report, even for the economically secure sections of society, financial assets and pensions account for a measly 3.7 percent of the balance-sheet. Instead, reliance is placed on the traditionally considered to be safe investments – real estate and gold. This shows that apart from inaccessibility, education and awareness remain significant gaps. In this regard, the UK system, which relies heavily on an informal and practical guidance provided by an independent ombudsman, is a good model to look at. The distinguishing feature of this model is that this system, apart from resolving complaints, also provides also provides impartial financial advice. The fact that the provision of advice is independent of the provision of pension services brings in an unparalleled degree of independence and efficacy. 

 

International experience shows that countries like Canada and Chile have managed a near dramatic turnaround in the quality of their pension services. The Canadian system, which was hailed as one of the best pensions model in 2017 by the World Bank, is a feat that was achieved thanks to a heavy reliance on the expertise of a diverse set of stakeholders representing labour, finance, government and business interests. Chile is one of the best examples of a successful pension system among developing nations, a stature which has been reached after more than two decades of systemic reforms by the government. 

 

For an aspiring economic superpower like India, the near abysmal figures when it comes to pension coverage do not bode well. One of the key takeaways from the global trendsetters is the existence of a simple and easily comprehensible pension system, which is in stark contrast to the Indian system which suffers from a fragmented structure and coverage gaps. Reliance on independent expertise and impartial consumer redressal mechanisms have also contributed greatly to the success of these systems. The lessons learned from these jurisdictions, coupled with a serious and extensive stakeholder engagement should form the basis of legal and regulatory reforms in this area.