India Moves to Transform Its Pension System

Divyakant Solanki/European Pressphoto Agency A government employee of the telegraph department at his workplace in Mumbai, Maharashtra, on July 15.

Ashwini Kumar Sharma, 60, a data processing assistant with India’s Ministry of Home Affairs, is about to retire after 41 years of working with the government. After retirement, he will receive a monthly pension that will equal half the last salary from his employer. He will get to withdraw the money that a mandatory government program made him set aside during his working years, along with the interest it accrued in a savings account.

Mr. Sharma will also be given a certain sum, known as “gratuity”â€" a token of gratitude for decades of service.

“Pension gives me a sense of security,” said Mr. Sharma, who is retiring at the end of September. “I am not worried about eating two square meals a day after I retire.”

He is one of India’s estimated 90 million elderly, defined as those 60 years and older, according to a United Nations report. By 2050 that number is expected to rise to 315 million.

India does not have a universal social security plan for its 1.2 billion people. The pension system covers only about 12 percent of the working population, according to India’s Ministry of Finance.

In 2004, the government introduced the National Pension System, or N.P.S. It marked a radical transformation from the government’s benefits-based pension program to one in which employees contribute toward their own retirement funds while employed. The new system affects people employed in the federal government after 2004, with the exception of India’s armed forces, who are part of a separate pension system. State government employees in 27 out of 28 Indian states have also been brought under its ambit, according to a government release.

A regulatory body created in 2003 that manages the new retirement savings package will be given legal status once India’s president signs into law a bill known as the Pension Fund Regulatory and Development Authority Bill, 2011. The Indian Parliament approved the draft law earlier this month, after amending some provisions of the existing bill, but its details are not public.

The draft legislation was aimed at reforming the pension sector, limiting government’s pension liabilities in the long run and expanding the social security safety net for the national population.

In the current financial year, which begun in April and ends March 2014, the government has budgeted 30,000 crore, or 30 billion rupees ($473 million), for pensions and other retirement benefits for employees who continue to be part of the old pension system, which is indexed to inflation â€" the pension amount will increase whenever the government revises salaries due to high inflation.

Foreign companies will be allowed to hold up to a 26 percent stake in Indian businesses selling pension products once the law goes into effect.

The new pension system was extended to the non-government sector in 2009. Most companies in the private sector with a staff of at least 20 people are required by law to participate in a savings plan run by a government organization, known as the Employees’ Provident Fund Organization. Under this program, a small portion of an employee’s salary with a matching contribution from the employer is put into a pension plan and long-term savings that accrue interest, at a rate which is revised by the government every year.

According to the statistics released by the Indian ministry of labor and employment in 2011, 26 million people work in the organized public and private sectors in India, while 433 million Indians work in the unorganized sector, a figure that includes daily wage laborers and workers at smaller businesses and a host of other jobs.

Anindito Mukherjee/Reuters Daily wage laborers at a roadside telephone booth in Old Delhi on Wednesday.

Since the informal sector is loosely structured, the existing pension programs are not mandatory for them, creating a need for reform.

“It was realized that people in the unorganized sector did not think of pension savings,” said Ashvin Parekh, a senior expert adviser at Ernst & Young consulting firm in Mumbai, Maharashtra, explaining that now they can voluntarily participate in the new pension system.

Keshav Sharma, 28, followed in the footsteps of his father, Ashwini Kumar Sharma, by taking a job with the Indian government after Keshav left his job at a privately-run IT start up.

“The government job offers better security,” said the younger Mr. Sharma, who now works as an assistant section officer in India’s Ministry of Defense.

Yet he was unsure of the merits of the government’s new pension program. The younger Mr. Sharma contributes 10 percent of a portion of his monthly salary; his employer makes an equal contribution. The aggregated amount is put into a pension account and invested in market-driven pension products sold by three public sector financial institutions chosen by the Pension Fund Regulatory and Development Authority, or PFRDA. A total of eight companies, including five from the private sector, have been enlisted as fund managers by the pension regulator.

“I keep asking myself whether this plan is a good or a bad thing for us,” he said. “It is a market-driven program. I don’t know how much I will get on my retirement.”

Every month, money gets deducted from a government employee’s salary and designated financial institutions then invest the funds in equities, government securities and debt including corporate bonds. They invest the money on the employees’ behalf under rules established by the regulator.

“We are not consulted before our money is invested,” the younger Mr. Sharma said.

An employee of LIC Pension Fund Limited, who was not authorized to speak to the media, said the savings of government workers are divided between the LIC, SBI Pension Funds Private Limited and UTI Retirement Solutions Limited.

“The funds are routed through an authorized bank to each of these companies, which handles a corpus of funds, not individual accounts.” The money is then invested according to the PFRDA guidelines, the employee said.

Every person signed up for the new pension program is given a “permanent retirement account number” that can be used to track the investments and the interest and other earnings from the money. Mr. Sharma said that at present, the online account does not allow a government employee to switch to a different pension product or change a fund manager.

“What if a company our money is being invested in goes bankrupt?,” he asked. “We will lose all our savings.”

Officials acknowledge that there are always inherent risks to investing in such funds.

“The basic axiom for investment is no risk, no gain,” said Yogesh Agarwal, the chairman of the PFRDA.

Manish Swarup/Associated Press An elderly man in a neighborhood in New Delhi.

Mr. Agarwal is convinced that once the pension draft legislation is signed into law, it will ameliorate the anxieties about the National Pension System.

“It will instill confidence in people about the pension product, and ensure superior return on investments,” he said.

The PFRDA touts the National Pension System as the cheapest pension product in India offering high returns. In the financial year that ended March, the returns on the plans offered under this program ranged between 12 to 14 percent, Mr. Agarwal said.

A minimum annual contribution of 6,000 rupees, or $95, is required to keep the pension account open, and it is portable across jobs. On retirement, 60 percent of the money can be withdrawn and the remaining 40 percent has to be reinvested in life insurance products sold by companies authorized by the PFRDA. If someone makes withdrawals before reaching age 60, only 20 percent of the savings can be taken out, although the recent amendments in the draft legislation made a push for that percentage to go up to 25.

The regulator has registered 5.2 million subscribers and accumulated almost 35,000 crore, or 35 billion rupees ($552 million) in contributions since 2004, according to figures released in August.

Mr. Agarwal of PFRDA said that in the old defined benefits system, government employees are paid through the current year’s government revenue, a fiscally dangerous practice. The defined contributions system allows the government to rectify its mistake of “funding its own liability,” he said.

Even with the introduction of the new law, the government will not be able to offset its pension liability for at least the next few decades, experts say.

“The idea of pension is to reduce uncertainty, vulnerability and poverty in old age,” said Mukesh Anand, an assistant professor at the National Institute of Public Finance and Policy in New Delhi.  “But the new bill doesn’t address the core objectives of pension.”

He added that the government was trying to shift the burden of paying for pensions from the public system to the individual.

The new pension package, which the government is trying to sell to the non-government sector, faces stiff competition from other pension products already available in the market. Mr. Parekh of Ernst & Young estimates it to be a $7 billion market. He described the National Pension System as the cheapest product available, but said that it is the returns that matter and not the cost.

“There are 38-40 other financial instruments available in the market, the N.P.S. does not compare too well with them,” he said referring to other investment options.

Pointing to one of the shortcomings of the new pension system, he said, “The architecture is all wrong. The beneficiary is so remote from fund managers.”

Mr. Parekh expects the pension sector to grow substantially as the life expectancy of Indians increases.

“Rising income levels will lead people to think: ‘If I were to live longer, what will become of me,’” he said.