Losing out

It’s been more than two years since new government recruits moved from the old “defined-benefit” category of retirement schemes to the fiscally less problematic “defined-contribution” scheme (thus capping the government’s liability on this score). So the continuing failure to get a new law passed so as to allow the pension scheme to take effect, and to have its funds properly invested, is inexplicable. The result, as a report in this paper has pointed out, is that although nearly 500,000 government employees have moved to the “defined-contribution” scheme and are being debited their pension contribution every month, the money has not been invested anywhere, on the grounds that the law is not in place! Their money is simply lying in the Consolidated Fund of India and getting an 8 per cent return. That may not be unattractive in today’s debt market, since risk is non-existent, but anyone watching the stock market reach for the stratosphere would recognise the lost opportunity. So, any chance that these employees had of riding the stock market boom with their retirement funds has been lost, even as stock prices have more than doubled in the period of inaction.

What is worse, the government does not have a consolidated database on the new employees. The records only say that Rs 233 crore has been collected from 81,000 employees, but this list excludes the much larger number of employees of the railways and of organisations that get funded through the government (such as teachers), and of state governments. With such large numbers of people involved, the vital importance of foolproof accounting can hardly be over-stated. Today, that risk cannot be ruled out. Surely, since India has organisations with the experience of handling large databases, and which are up to managing the back-office work for the new pension scheme, it is time they were brought into the picture. And the government should also consider whether, even without a new law, it can deploy the funds collected under the new pensions cheme, by involving private sector fund managers.

The last thing the employees concerned need is the service level of the Employees Provident Fund Organisation (EPFO). So it is important to note that it is not just government employees who will get covered under the new pension scheme. Any citizen who today has no option but to take what the EPFO offers, could consider the new opportunity. For, while the interest paid by the EPFO is higher than that paid on government securities, the EPFO does not invest in equity markets (as private pension fund managers would), though there are enough studies which show that stock markets offer higher returns—even on a risk-adjusted basis. Apart from the issue of higher returns, there’s also the issue of efficiency that needs to be considered. The EPFO has over Rs 8,000 crore in dormant accounts (people who’ve moved from one job to the other but have not transferred their funds). In comparison, under the new pension scheme, each member has a unique ID that stays with him/her while moving from one job to the next. The most important factor in favour of the NPS, clearly, is its potential reach across the country—today, even if you take the EPFO’s number of enrolled members (41 million) at face value, this is still just 10 per cent of the working population. In 2002-03, the mean pay-out by the EPFO to those retiring was Rs 36,000, which is enough to get you an annuity of no more than Rs 270 a month. The country should be able to do better than that for its senior citizens.