The Hindu : Retirement blues

Online edition of India's National Newspaper
Monday, Sep 08, 2003

Opinion

Opinion - Editorials

Retirement blues

THE SIGNIFICANCE OF the new pension scheme for Central Government employees has to be seen in the larger context of social security and retirement planning in this country. The scheme, which was cleared by the Union Cabinet recently, covers only those employees who joined service after October 2002. Those who work for State Governments and in the private sector can enlist but at a later date. Despite its limited coverage for now, the new scheme is relevant for a number of reasons. It is the first major attempt at reforming the pension system, a move that was overdue. Only 11 per cent of India's working population has some form of social security for old age. Large sections of those employed, such as professionals, self-employed persons and those in the unorganised category, have no means to secure an assured post-retirement income. With the expected increase in life expectancy, the problems of an ageing population will become acute: 86 out of 1000 Indians will be above 60 years of age by the year 2016. Pension schemes operated in the Government sector have already run into grave financial difficulties, with the exchequer being unable to fund the liabilities in most cases.

Through the new pension scheme, the Government shifts the burden of retirement planning — of at least its new recruits — to the marketplace. Out will go a guaranteed pension from the treasury. Employees will contribute to the fund as they work. The return will depend upon what the fund earns. Designed like a mutual fund, the scheme allows three options to the prospective pensioner to park his or her savings: to invest (a) predominantly in equities, (b) in a mix of equities and debt instruments, and (c) predominantly in debt instruments and Government paper. Those correspond to the "growth", "balanced" and "regular return" schemes of mutual funds. A new regulatory authority, to be constituted soon, will be critical to the success of pension reform. Safety of money invested and the integrity of the professional fund managers can be ensured only by enlightened regulation. The Government's role will be no less crucial as the scheme has to be buttressed by tax and other incentives. The experience in many other countries shows that the success of long-term contractual savings schemes, which pension accruals are, depend critically on the availability of incentives. The latter can also be justified in the context of their beneficial effects in capital market development and long-term infrastructure funding.

Will the scheme blaze a trail for large-scale pension reform? One has to be circumspect at this stage. How the fund can invest safely and yet generate adequate return is hardly clear. The risks of deploying long-term savings in equities need to be highlighted. Too often in the recent past, banks as well as other custodians of savings have failed to evolve a coherent stock market investment strategy that ensures both safety and a reasonable return. Long-term debt instruments, especially those used for funding infrastructure projects, are the logical destination for pension funds overseas. Such avenues are scarce in India. Even if the inherent market risks are mastered, there is no guarantee that the scheme's success can be replicated to cover a much wider constituency. Only a small fraction of the working population still cares to plan for retirement. Along with making available appropriate schemes and strengthening existing ones such as provident fund, gratuity and life insurance, public policy must help raise that awareness. The new pension scheme of the Central Government has its merits. Nevertheless, it will be a modest effort against the background of an inadequate social security system.

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