The Narendra Modi government recently introduced an ambitious pension scheme to give stability to India’s unorganised labour class. This is the second pension scheme that Modi government has introduced during its tenure. However, the two pension schemes have ended up fragmenting an already fragmented pensions market.
In this year’s interim budget, then acting finance minister Piyush Goyal announced the Pradhan Mantri Shram-Yogi Maan-dhan (PMSYM) scheme for unorganised sector labourers. The scheme duplicates the structure of the existing Atal Pension Yojana (APY), announced in 2015, but without the regulatory oversight of the Pension Fund Regulatory and Development Authority (PFRDA).
Such defined-benefit promises are problematic and can soon become fiscally unmanageable. Several successive governments have introduced pension schemes but decades later, the unorganised sector doesn’t have any comprehensive policy that systematically benefits the country’s old-age group.
The PMSYM promises a defined benefit of a monthly income of Rs 3,000 for any labourer over the age of 60. Labourers who currently earn less than Rs 15,000 are eligible to become members. Those between 18 and 29 years will have to contribute Rs 55 per month and those aged above 29 have to pitch in with Rs 100. These contributions will be matched by the government.
There are various reasons to be sceptical of this structure – regular contributions are difficult for those without regular salaried jobs, a pension of Rs 3,000 will most likely be insufficient given the rising inflation, and the ability of the banking network to service such clients across the country is limited.
These concerns are pertinent given that the Modi government’s previous pension scheme, APY, which is being managed by the PFRDA, hasn’t really taken off.Before announcing a similar scheme, it might have been useful to understand the reasons for the tepid performance of the APY.
Perhaps, the truth is that distributing pension schemes to a liquidity constrained population is a huge challenge. The APY had replaced the earlier co-contribution scheme, the National Pension System-Swavalamban (NPS-S) scheme quite suddenly. Perhaps, such abrupt closure of schemes makes the population suspicious of locking in their money for long periods. Even if the government makes provisions to transfer the money to the new scheme or return the amount invested, the transaction costs imposed can be significant.
A bigger concern with a defined-benefit scheme, and this also holds for the APY, is that it can very easily become fiscally unsustainable. This has been the experience of various schemes across the world, especially in OECD countries, where demographic transition has meant that the same funds are no longer enough to sustain benefits. Closer home, little is publicly known about the funding status of the Employees’ Pension Scheme (EPS), which also pays a defined benefit pension.
What is therefore required is an investment strategy for the monthly contributions from the members, and regular actuarial evaluation of the fund generated. This should be followed by parametric changes by way of increasing contributions, increasing the retirement age from 60, changing the investment strategy, or increasing budgetary allocations when it appears that the fund may be running deficits before it becomes too late.
Without such continuous valuations, the scheme may soon become unsustainable, with implications for both — members, who may just stop receiving benefits; and tax payers, who may have to bail out the fund. As of now, there is no documentation in the public domain to evaluate how the PMSYM fund is going to invest the contributions, and how it is going to be valued. Therefore, it may be appropriate to worry about both the welfare and fiscal consequences of such a scheme.
Little is also known about the governance of the proposed PMSYM fund. The current and historical performance of several provident funds that are directly governed by a “Central Board of Trustees” leaves much to be desired.
For example, the Seaman’s Provident Fund faced a hole of almost Rs 93 crore in April 2002 owing to mistakes in its bond trades. More recently, a CAG audit found that the actuarial valuation as on 31 March 2013 calculated a net shortfall of Rs 19,698 crore in the Coal Miners Provident Fund. The 26th Report of the Standing Committee on Labour has drawn attention to inadequacy in the governance of exempt funds and lack of a comprehensive monitoring mechanism of the supervisory authority, namely the Employees’ Provident Fund Organisation (EPFO). Current regulatory mechanisms for these provident funds appear inadequate. This suggests that a lot more will have to be done to ensure good governance of the PMSYM.
The pensions market is already fragmented. There is the National Pension System (NPS), the APY, schemes under the EPFO, other provident funds such as Seamens and Coal Miners, as well as plans sold by the insurance companies. All these get regulated differently, leading to a situation that there is no holistic pensions sector. Among these pension fund administrators and regulators in India today, the PFRDA has the most modern and transparent governance mechanisms. Given that the PFRDA was already administering the APY, the government could have routed co-contributions through this mechanism, thus ensuring that it has not laid the seeds for another potential fiscal problem in the future. It would have also not led to further fragmentation of the pensions market.
Renuka Sane is an associate professor at the National Institute of Public Finance and Policy (NIPFP).