Comedy writer Gene Perret once quipped “Retirement- It’s nice to get out of the rat race, but you have to learn to get along with less cheese”.
Sad yet true! The end of ones productive years ushers in a dark period of uncertainty and insecurity. Most of the retirees don’t accumulate a corpus big enough to ride through the last few years, and as Gene mentions “learn to move on with less cheese”. Deterioration of health and lack of institutionalized social security only makes things worse for the retired. Once an average Indian lives up to 60 years, he/she is expected to live for 17 more years. The social security nest that he builds over his lifetime has to accommodate his needs in the remaining years. Going by current levels of inflation and hike in healthcare costs, one shudders to think about consequences of an ill managed retirement

In a fast paced economy like ours, a young and ever growing labour force is our competitive advantage. This generation is expected to accumulate good amount of wealth for the nations in terms of savings and investments which in turn would propel the economy to dizzying heights. An estimated 920 million Indians would be in the job market by 2025. The older generation would pave way for the young to take the nation forward. With labour mobility and emergence of flexible working styles on the rise, this ambitious generation would change the traditional Indian attitude of working ‘life-long’ to retiring early and enjoying the fruits of labour.
Historically, India never had a comprehensive social security system. Formal retirement plans cover only about 12% of our labour force. The rest are let to fend for themselves or rely on private pension plans. There are a few mandatory schemes for state and central government employees under the EPS umbrella. States in India have followed ad-hoc procedures with questionable rationale in fixing pension liabilities and never really bothered to enforce fiscal discipline. This led to introduction of FRBMA in 2003. Even then only few of our states today show signs of improved fiscal behavior. Need for Fiscal stability of such schemes has propelled to the shift happening to ‘defined contribution’ which is more predictable and augurs well for long term sustainability of such reforms.
A direct link to retirement corpus of an individual can be linked to savings rate. As per a WSJ release, India has one of the highest gross domestic savings rates in the world at 35% only behind China and Malaysia. This includes savings in cash and physical household savings (gold and property). A significant chunk of our population lives in tier-II cities and tends to save more owing to lower costs of living. Such developments act as valuable inputs for an institutionalized social security system that strives to cover all its citizens. Its like a huge pie that the government must judiciously use to protect its citizens and maintain social cohesion at the same time so that any particular segment of the society doesn’t feel compromised or taken for granted.

With the introduction of NPS (New Pension Scheme), the government think-tank is paving way for a contribution based, effectively managed delivery model for pensions in India. It faced stiff opposition from labour groups that have pressed for ‘defined benefit’ model of pension payments without understanding the huge fiscal ramifications that can be disastrous. If one remembers, the left parties defeated our PM’s ambitious plans to pass the PFRDA bill in 2005. NPS aims at bringing in professional management, transparency, accountability and portability to managing the monies of the largest labor force in the world. It’s the world’s lowest-cost model for retirement benefits and seen as the panacea for all the problems that have clogged the social security juggernaut. Yet, NPS has failed to take off since its launch to non government staff. Poor marketing, skeptics questioning equity returns and lack of past performance have not helped matters either.

The PFRDA bill, after an aborted attempt in 2005, has been reintroduced in the parliament last month. Surprisingly enough, the opposition has also given thumbs up to the bill this time. The bill strives to give PFRDA full powers to manage and develop the industry. Also FDI cap of 26% is also proposed for this industry in line with Insurance. Though ‘All izz well’ when it comes to introducing such reforms, it remains to be seen how effectively it’s implemented and how extensive is the reach of such reforms.
Some key points and observations about this bill, if implemented
The good –

1. Proposal for FDI to be capped at 26%. Many FDI’s(including AVIVA, AIG, AXA) who have exhausted their cap in Insurance firms in India may look at entering the attractive pensions market
2. Swavalamban scheme that aims to incentivize members who contribute a maximum of Rs.12000 per year. This should encourage the unorganized sector to pool in savings
3. An opportunity for the average Indian worker to take advantage of the booming markets and build a corpus faster enough for a rainy day
4. Effective channelization of funds to much needed sectors like infrastructure, green energy etc. This would result in a symbiotic relationship and such sectors would get ready equity from pension funds, thereby reducing cost of operations and enhanced profitability that would be eventually passed on to the investor over a longer period of time
5. Take the burden of pensions from state and central government and help them rein in fiscal deficits as pensions payment is the largest component of state expenditure.
6. Judicious allocation of assets into equity/debt and liquid funds resulting in optimized returns. Would also meet the demand in the bond markets as pension funds look to invest for longer periods
7. Act as a boost for private insurance firms as a part of the retirement corpus would be utilized to purchase an annuity.
8. Pensions would now be free from politics and linked more to economy.
9. Last but not least, empowering the investor to decide his own strategy of investing(Active/passive)

The not so good

1. Tax treatment of such pension funds is still unclear. As of now, premature withdrawals are treated as income and are taxed. Hope DTC implementation in 2012 answers this
2. The private annuity market in India as of now is underdeveloped. The stupendous performance of a pension fund may be crippled with non-availability of suitable annuity plans at maturity
3. Distributors of NPS need to be incentivized more to reach the weakest sections of the society. Penetration levels for NPS have been far from satisfactory
4. Poor financial literacy and risk averseness of the average Indian acts as a major hurdle to such funds

In totality, if India wishes to tide over the huge demographic mismatch that would happen in the next 30 years, it has to implement pension reforms at the earliest and make sure that while the government carries on with it’s core job of maintaining fiscal stability, its citizens must also be adequately covered to have a safe and hassle free retirement

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