There's hole in the bucket

A delegation trooped into North Block today to convince Finance Minister P Chidambaram that the insurance industry should be given a shot at managing the pension and old age security needs of India. Politely put, it was a lobbying mission, but it had one major significance: this was the first time that this government was applying its mind to the problem.

Till now, the debate on old age security has been hijacked by a single percentage point, or whether the interest rates paid to employees’ provident fund (EPF) members should be 8.5 per cent or 9.5 per cent. While this has raised temperatures, it has sidetracked the real issue: India does not have a workable system that will look after the financial needs of its people when they age.

The unorganised sector, which comprises 93 per cent of India’s work force, is virtually out of the loop. The civil servants may have their pension schemes and others in the organised sector can put money in provident fund, but the percentage of Indians who are being retirement-proofed is tiny.

Either they are being encouraged to set enough money aside for retirement or that money is not being invested in the smartest way possible to ensure that a large-enough kitty is built up to last through their old age.

Just consider the mess:

On the face of it, government officers are the best-protected, and a New Pension Scheme has been put in place from January 1, 2004. Each new entrant sets aside 10 per cent of his salary towards pension, which the government matches. The idea was that the regulator, Pension Fund Regulatory Development Authority (PFRDA) would ensure that professional fund managers invested this money wisely and maximised returns as they diversified into equity and corporate bonds. Instead, the money is just going into government securities, earning much lower interest rates.

Suppose this ‘‘lazy investing’’ goes on for just one year, you wouldn’t think it would matter much. True, the difference between what a professional would have earned and what securities pay may seem small in the first year of a Group A officer’s career. Compounded over his working life, just the first year’s lapse could translate into a difference of Rs 14 lakh.

Why is PFRDA letting it happen? Because this pension custodian exists only on paper now. Its chairman and two members have already resigned and there is no sign of replacements. Meanwhile, the insurance lobby wants PFRDA scrapped altogether and replaced by the insurance regulator. It wants the pension business to be given to insurance companies. That is what today’s meeting was about.

While you may think that civil servants can fight their own battles, turn to the rest of the organised sector which has just seen interest rates on provident fund slashed to 8.5 per cent. In fact, EPFO’s problems are just beginning. Till now, it was parking its funds in the Special Deposit Scheme (SDS) that gave it higher returns than government bonds.

From last year, new money has not been allowed to go into SDS. This means EPFO can only invest in instruments that probably won’t pay more than 6.5 per cent. So in future, that is all that EPFO may pay its members, since it cannot give more than it earns. This will barely be 2 per cent more than the rate of inflation.

Workers may console themselves: at least our money is safe since it has been parked in government bonds. Think again. More than Rs 1,500 crore has been invested in bonds issued by the governments of Bihar, Uttar Pradesh and Orissa. Their health is questionable.

Even if all the money is recovered, can a worker in the organised sector hope to lead a hassle-free retirement? Impossible. Although these workers sink one fourth of their salaries into the EPF (they pay 12.5 per cent, with a matching contribution from their employers), they are allowed to withdraw without sufficient restraints during their working life. The result is that this year, a worker’s average balance is just Rs 36,000. That can hardly be considered sufficient security.

India must answer all these questions at a time when it has more retirees and senior citizens than ever before. If they can’t fend for themselves, the burden will fall on the relatively smaller working population. It may be too heavy a load.

Ila Patnaik