After six years of deliberations by two governments and three Union finance ministers, India finally acknowledged the need for extending formal pension arrangements to its 350 million informal sector workers by introducing the New Pension System on January 1, 2004. This pension scheme was mooted as a social defence mechanism by the ministry of social justice and empowerment through its Project OASIS (Old Age Social and Income Security) report on January 14, 2000.
While the original intent of the NPS was to provide the first opportunity to the majority of India's workforce to save for their retirement, the government decided to extend this contributory pension scheme to its own new employees.
This was a sensible move since the exchequer is today forced to pay over Rs 100,000 crore (Rs 1000 billion) per year for a very generous unfunded pension to government retirees who constitute less than 1 per cent of India's population.
This step would also result in capping India's implicit pension debt, which is estimated at over Rs 20 lakh crore and will have to be financed through future taxes. In line with this decision, the government notified the new (contributory) pension rules for people who would join Central government service after January 2004.
A review of the progress of this critical reform after 24 months and six Parliament sessions, however, presents a mixed picture. An estimated 200,000 Central government employees are already covered by the NPS and 15 state governments have also formally adopted this scheme for their own new employees.
Don't let the Left hijack pension reforms
These include Andhra Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Himachal Pradesh, Jharkhand, Maharashtra, Madhya Pradesh, Manipur, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttaranchal.
Dhirendra Swarup has been appointed full-time chairman of the Pension Fund Regulatory and Development Authority. The PFRDA Bill, tabled in the last Budget session, has been reviewed by the Standing Committee on Finance under BC Khanduri.
The SCOF, while proposing some useful amendments to the Bill, has correctly called India's pension reform an "urgent necessity". In this period, the finance ministry has completed a national level exercise to size and segment the market for voluntary pensions among informal sector workers.
Through this effort, the government has identified a population of 22 million workers who are "extremely interested" in the NPS and also have the financial capacity to contribute towards an adequate annuity.
Considering the broad-based political will, India's huge demographic advantage, the social cost of its mounting pension liabilities, and the large-scale unmet informal sector demand for a retirement provision, it is surprising that the civil service unions - who are at best a minority interest group - have successfully managed to stall this critical reform.
It is also ironic that these negotiations have hit their own members hardest - for while India's equity markets scaled new highs and delivered nearly 200 per cent returns in this period, government employees under the NPS have had to make do with the modest 8 per cent GPF returns on their contributions.
Even if there was any merit in revisiting the new pension rules for new government employees, it cannot be at the cost of putting the rest of the country on hold. For while these negotiations were on, nearly 12.3 million earners have retired in the last two years. Most of them will face a grim battle for survival over the next 20 years since barely 4 per cent of these earners were entitled to a pension.
It is time for the government to stop thinking only as an employer and start thinking like Government of India. The PFRDA Bill is about setting up a well regulated pension system which will enable the average earner to save for retirement over multiple decades.
The employment terms of Government of India or the contribution rate it sets for its employees is of no relevance to the PFRDA. The result of the government's negotiations with its unions does not in any way undermine the urgent need to get started with pension reforms for the rest of India.
And if necessary, these negotiations can easily go on while the PFRDA is building the institutional capacity and drafting regulations for providing secure and broad-based access to this new pension scheme.
It will take us a generation of hard work to achieve significant voluntary coverage of the NPS among the 350 million informal sector workers. In this context, the government would do well to decouple its concerns as an employer from its responsibilities towards its citizens and proceed with the PFRDA Bill.
And focus its energies into innovative actions to overcome the huge voluntary pension coverage challenge instead.