Private pension plans, wherever they exist in our country, are erratic and not uniform. There is no comprehensive plan to pay pension to the aged in both the organised and unorganised sectors.
To get an idea of the magnitude of the problem, the Dave Committee, which was set up under the aegis of the ministry of social welfare and empowerment and submitted the old age social and income security report, stated: "Providing a Rs 100 per month old age pension to the projected 175 million population of the elderly in 2025, would translate into an annual outflow of over Rs 21,000 crore for the government."
The committee also mentioned in its prefatory remarks that "in India, while the total population is expected to rise by 49 per cent between 1991 and 2016, the number of elderly (people aged 60 and above) is expected to increase by 107 per cent to 113 million or 8.9 per cent of the total population. Demographic projections further suggest that the number of the aged will rise even more rapidly to 179 million by 2026 or to 13.3 per cent of the population."
This report has now gone into the national archives, if not total oblivion. However, there is a good possibility of this report being dusted off, since Jaswant Singh has now opened the door for a Pensions Regulatory and Development Authority, which he announced in his Budget this year. What should the authority consider? Some of the key issues are:
- Who is eligible to join the pension plan? We must allow every employee who has put in two to five years' of work experience to enter the plan.
- Should the plan be contributory or non-contributory? It is wise to give the employees a sense of participation by keeping the plan contributory. That will give greater defined benefit at retirement, while lowering the ultimate cost of the pension plan.
- If employers will contribute, should there be a ceiling on their contribution or should their contribution be simply a matching one?
- Together, if the contributions are 10 per cent of the salary, that should be salutary, provided the whole of it would be exempt from income tax.
- Should there be a trust established to deal with investment of the accumulated fund? This depends upon the policy, whether to involve insurers to get annuities paid or to use a combination plan, using insured and trust fund plans.
- What should be the investment strategy? The 401(K), a private pension plan popular in the US, has a mix of many investment vehicles ranging from stable value funds to aggressive growth funds, which comprise stocks with greater than average potential fund growth.
On the other hand, the OASIS report fixes three criteria -- income, balanced income and growth -- and it was suggested that the major investment vehicles were linked to the level of growth or safety sought.
- What should be the method adopted -- "defined contribution" or "defined benefit"? In the former, the contribution by the employee is agreed upon. This could be any of several methods, such as a flat "dollar" amount or a certain percentage of the salary. Sometimes, a combination is tried. In the "defined benefit" method, the amount of the future pension is agreed upon.
- Should death benefit be added, albeit as an incidental benefit? Once again, this is a matter of the employers policy. The death benefit should only be incidental to the pension and underwriting-wise, there could be clash of considerations and it is best to take away this benefit from a pension plan.
- Should disability benefit be included, with a waiver-of-contribution rider? Ideally, a pension plan should confine itself to pension.
- If death and disability were to be covered, does it then become inevitable to let the insurers handle the whole thing? Once again, cost considerations would discourage making the pension plan a cocktail of incongruent coverages.
- Is it advisable to resort to a combination plan, using insurers as well as some trust fund? This would be unwieldy to control in practice.
- How is inflation sought to be combated? In the absence of a variable annuity, linked to the cost-of-living index, a growth-based investment allocation would be advisable.
- If the new pension plan were to be comprehensive, would it have something for the self-employed? Even the self-employed can enter a pension plan if their professional associations would act like an employer and install a pension plan.
We will look at some salient features of the OASIS report here.
The new pension system is to be based on an Individual Retirement Account and each account holder will get a unique IRA number, which is permanent throughout his life. The individual will save and accumulate assets in his or her working life, subject to a minimum of Rs 100 per contribution and Rs 500 in total contribution a year.
Wherever the employee relocates, the assets will be transferred to a Point Of Presence. POPs would include bank branches, post offices, depository participant offices and any other location, from which electronic connectivity into a central computer system is possible.
Overall, it would be a good idea if India integrated the good features of both the 401(K) plan and the OASIS report. The 401(K) is a retirement tool provided through the employer; what you put in is what you get.
Some significant benefits are:
- A 401(K) account is tax-deferred.
- There is no tax paid on the contribution until the money is withdrawn as pension at retirement.
- Automatic pay roll deductions make for effortless savings.
- There is freedom to the employee to choose the manner of investment allocation.
- The plan is 'portable' when an employee switches job.
- The employees are not obliged to invest a certain stipulated minimum amount, if they choose to use professionally managed funds.
- Occasional withdrawals are permitted for special reasons.
- Employers may also contribute matching funds.
- The 401(K) plan allows the employees to switch their options to invest.
Now that the dream of an independent pensions authority has become a reality, the government must act fast in implementing this plan and making it an all-embracing one covering both the public and private sectors.
(The writer is professor and associate dean, research, with the International Institute for Insurance and Finance, Hyderabad)