Monday, June 09, 2014

Target 200-mn in NPS by 2019, club EPF into NPS & encourage reverse mortgage

I have been witnessing the pension reforms closely since 2003 and despite the mixed outcome in the last decade, there is so much that we can achieve in the next five years. I wrote an article in FE on what we should target.

Target 200-mn in NPS by 2019, club EPF into NPS & encourage reverse mortgage
Financial Express, June 9, 2014

It’s been a decade since the pension reforms were first dribbled out in early 2004 under the NDA regime. In 2014, as the ball shifts back to the BJP regime, it is an opportunity for the new finance minister to put the reforms back on track.
India has over 100 million elderly and this population will triple to 300 million by the time those at age 30 today turn 60. The last decade barely made a difference to the pension outcome of over 500 million workforce in the working age.

Civil servants’ pension reform has largely succeeded with 3.3 million central and state government employees now in a fully defined contribution (DC) system with pension assets (about R426 billion) invested in a mix of debt and equity. The old defined benefit (DB) and unfunded system where each retiree got a pension of about 50% of last pay has been successfully restricted to employees who joined before January 1, 2004.

But a few state governments are paying truant and the new regime at the Centre needs to focus on them. Maharashtra and Tamil Nadu joined the NPS long ago but are keeping the scheme funds in their public accounts instead of remitting the same to NPS. West Bengal and Tripura have not yet signed up. This is also an area where PFRDA, the pension regulator, has little influence.

Resting on a 1952 legislation, it is a challenging task to reform the Employee Provident Fund (EPF) but with a customer base of 50 million, it is an important cause. Measures like auctioning the fund management and moving forward on making the systems user-friendly could be counted as hits. However, well into 2014, there is still lack of assurance on maintenance of accurate data, with customer accounts even reflecting negative balances! The more important reform here is to look at integrating EPF into NPS.

The logic is evident. Private sector employees should be able to invest their mandatory provident fund in the NPS and benefits from scheme level choices and a largely glitch-free system architecture. With this, India can move closer to an integrated pension architecture with one pension account for a person irrespective whether one is in government or private service or is self-employed or switches career inter se. Here, the government should first put the NPS in order and ensure there is portability of account within NPS for the employees moving from government to private sector or vice-versa.

The Employee Pension Scheme (EPS) deficit (shortfall in scheme income as against its payout) has regrettably become a subject of debate with size estimates ranging from R500 billion to R100 billion. It would be a prudent to cap this deficit and shift the scheme to NPS for the new joiners.

Getting the NPS for private sector to scale up is an agenda that the government needs to pin up on its to-do list. With just 3,30,000 subscribers in five years after it was opened to public, it has nothing to show for. Here, the government needs to adequately invest in education and awareness and simultaneously fix the distribution.

There are other financial tools that seem to be promising solutions to strengthening the old age social security framework. Reverse mortgage, where one can loan one’s house to a bank and get a pension for life, is potentially one such solution. However, the idea of loaning one’s house is not an intuitive one and there are no clear models that India can potentially replicate. The finance ministry should take a crack at this, perhaps starting with the upcoming budget.

Finally, all of the above, even if done well, will not add up to eradicating old age poverty in India. The suggestion of a means-tested minimum pension (unfunded) or what is more commonly understood as universal pension is not necessarily a suitable one.

One could argue that our dependency ratio (percentage of number of elderly and children dependents per 100 working age population), at 53%, is expected to decline to 40% in the coming decade and our economy would presumably grow at a high rate—so we should aim for this. There is also merit in considering that the bulk of our population is poor and will not be able to save adequately on their own for their old age. The truth is that the western world with better finances is struggling with such systems and the math just does not add up over the long term. India will need to find its own solutions.

Latest data of NPS Lite, a scheme to motivate the poor to save for old age, shows that there are about 2.6 million subscribers with R8.1 billion corpus in four years. It seems to have had a decent start. The average account balance of R3,100 needs to be analysed. There is, however, a general lack of public data or discussion on how many of those who joined have continued to save in their second or third year. Driving persistent savings behaviour from a population with irregular incomes and lack of banking usage is the most important and difficult challenge here. The focus must grow beyond enrolments to outcomes, especially in socially-oriented pension schemes like the NPS Lite.

When he presents his first budget, the finance minister could look at extending the scheme co-contribution beyond 2017 and consider making the Swavalamban subsidy smarter as the present R1,000 annual co-contribution has had the unintended effect of limiting this scheme to becoming a ‘thousand rupee scheme’, where one gets R1,000 by investing R1,000 and the focus has shifted away from trying to save as much as possible.

It might also be a good time to review the product design and make it more attractive. For instance, bundling the NPS Lite with an inexpensive health insurance plan on the lines of RSBY could make it more appealing. Benefits of health cover are more immediate while pension plans take a long time to reap.

In the next five years, the government should target 100 million low-income workers in NPS Lite, 50 million informal private sector workers in NPS and give the 50 million EPF subscribers an option to migrate to NPS. Lastly, the finance minister and RBI should push for working a reverse mortgage model with at least 1 million participants to demonstrate its success.

Ashish Aggarwal

The author is co-founder and executive director at Invest India Micro Pension Services