Pension ecosystem: New body needed to bring all retirement funds under its umbrella

At a time when personal savings, unlike in the past, fetch insubstantial returns, the current generation of employees is concerned over its post-retirement existence. (Image: Reuters)

At a time when personal savings, unlike in the past, fetch insubstantial returns, the current generation of employees is concerned over its post-retirement existence. There are also added features to modern-day life, with changing demographic structure, enhanced longevity, etc. Pension payout is becoming an ever-growing burden on the exchequer, and might become excessive, as has happened in Brazil. In India’s case, this is occurring at a time when almost 110 million people of retirement-age are not covered by any old-age security scheme at all. Former central and state government employees drawing pensions would number around 10 million, while a further 4 million former defence personnel, too, would be on pensions. Former PSU employees and private sector employees drawing pension benefits from EPFO would number 5 million.

Former bank employees and of private companies like Maruti drawing from other pension funds, beneficiaries of general old-age security schemes (like those launched by state governments) and beneficiaries of various other government-run social welfare schemes would add up to another 4.5 million. Former legislators, Parliamentarians and UN personnel may total a lakh at the most. In all, less that 25 million people in a country of 1.3 billion get pensions—that too in a scenario where employment in the organised sector is minuscule. In spite of such measly coverage of old-age security, the Centre has realised the problem of payment of pensions to its former employees even as it is keen on extending the cover of old-age security to a greater chunk of the citizenry.

A plethora of reports—from the one by the Old Age Social and Income Security committee, under the chairmanship of SA Dave, to the Challenge of Old Age Income Security by the World Bank (April 2001), and from the Pension Reforms in the Unorganised Sector, a report by IDRA in October 2001, to the Bhattacharya Committee report on assessing pension liabilities of state governments (RBI, October 2003)—had come up with a raft of suggestions. As a logical corollary, the passing of the PFRDA Act and launching of the National Pension System (NPS) are the salutary outcome of these reports. Despite best-laid plans and good intentions, both on the regulatory front and in NPS, there were serious lacunae, warranting a surgical procedure to keep the pension pot from cracking and beneficiaries in good fettle.

The implementation of NPS has been half-hearted and perfunctory. The scheme has not been able to bring workers in the unorganised sector under old-age security cover—this, incidentally, was the primary reason for its creation. Instead, it has mainly become a contribution scheme for government employees and is imperceptibly substituting EPFO’s role in certain respects. There are many reasons why it has become important to look at the pension space. The cobwebs need to be cleared for better clarity for stakeholders. The implementation of pension schemes is riddled with serious shortcomings, and beneficiaries get short-changed. There are a host of factors working against the beneficiary.

A tiny fraction of the old-age population is getting pension. In the case of many pensioners, the amount can only be dubbed social security assistance, and not pension in the real sense. There are no comprehensive and authentic statistics about the agencies working in the pension space and no reliable data on the number of funds, even as registration is mandatory under one law or another. There are various kinds of pension funds in India, some of which function on their own and enjoy all benefits without passing these on to the beneficiaries. There is no clear count of the pension funds operating in the country—informal assessment puts it at less than 3,000, with the quantum of funds being more than `20 lakh crore.

Many pension funds have gone bankrupt, causing hardship to the contributors. But no solid action was taken against erring elements, and 90% of pension funds operate practically without any regulation. Lack of regulation has led to reliance on activities that can be termed irregular. The Income-Tax Act, for instance, gives benefits to the contributors on fulfilment of certain conditions by pension funds. But nearly none of the assessing authorities are aware of these provisions and no forum has attempted to address this. While contributors beef up pension funds without getting refund on time, many pension funds have short-changed contributors—some have invested funds in the parent firm’s equity and lost outright, to the lasting loss of the contributors. In certain cases, influential sections of contributors grabbed more benefits at the expense of others, mostly the uneducated without any clout or assertive rights.

The pension fund management and the ministry of finance’s instructions are biased towards large contributors, leaving small contributors in the lurch. There is no regulation of administrative charges levied by pension funds. Even after administrative charges were cut by a hefty 30% in the last two years, EPFO still charges a high amount. The guidelines about investment are not being followed by a significant number of pension funds, causing loss to pensioners, besides depriving the exchequer of more revenue at lesser rates. The regulations about fund management of retirement funds are non-existent. In this grim scenario, introspection by all the stakeholders, including the Centre, state governments, Sebi, the corporate sector, and banks and financial institutions is the need of the hour so that the concerns of the pensioners get duly addressed and assuaged.

It would be germane to suggest that an organisation on the lines of the Association of Mutual Fund in India is badly needed. This can be christened the Association of Retirement Funds of India. This new body can bring under its umbrella all retirement/pension funds, foster a code of conduct and genuine hand-holding for the pension/retirement funds which are now looking for due guidance and delivery. Alongside, a new body, viz. the Pension Institute or Pension Research Association, can also be floated by a few financial institutions, which can be in the form of instituting a new chair in some well-known institutes such as the IIMs, exclusively for doing pioneering work on pensions. All these proposed bodies can work in synergy as the pension space demands community and area-specific products.

By KK Jalan

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