October 22, 2002
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Money > Special October 22, 2002 |
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Are pension fund schemes bad ideas?Ashok V Desai As the new millennium dawned, Surendra Dave's OASIS group unveiled a new pension plan for India.
All the government workers' contributions and a good proportion of the rest are collected into the Employees' Provident Fund by the Central Provident Fund Commissioner. Workers retiring in 1997-98 got Rs 25,000 on the average; in the same year, contributing workers took out Rs 17,000 on the average. In other words, the EPF was a provident fund only in name. In reality it was a racket; the government forced workers and employers to pay into the EPF, but the workers earned the tax relief and took out the money as soon as they could. And because of the huge number of racketeers, the government could not close down the scam. To tackle this racket, OASIS proposed a new pension system of individual retirement accounts (IRA), into which a person could contribute all his working life. He would continue to own the account irrespective of changes in jobs, location or access points. But he could withdraw the money only after retirement. He would be able to go to any of the thousands of Points of Presence and pay into his IRA, get the balance, and decide on a manager for his IRA or change him. The POPs would be located in banks, post offices, depository participants' offices, et cetera. Records of all IRAs would be maintained in a central depository. The IRA-owner would be able to choose amongst a number of pension fund managers and annuity sellers. Six pension fund managers would be licensed by the government. Each would offer three funds - a safe one, a less safe one and a risky one, depending on the proportions of government bonds, private bonds and equity, which the government would fix. The saver would choose between the 18 schemes; if he did not, his money would be put into the safe fund which had given the highest return in the past year. He would be able to take Rs 5,000 a year from his account provided his balance exceeded Rs 10,000. A year after the OASIS report, the World Bank published a study of the Indian pension system. It showed that a worker who made the maximum withdrawals would get only half as much on retirement as one who made none; and the reason why workers took out as much money as they could was that the EPF gave a very low rate of return. The World Bank also recommended that the savers be given a choice of investment plans. It proposed a contribution-based pension equal to 90 per cent of the terminal wage with a ceiling of 120 per cent of the average wage. Last week, Invest India held a conference in Delhi to take another look at pensions. The number of covered workers has now grown to 42 million from 34 million in 1991. Of these, 26 million are covered by EPFO. EPFO administers both the employees' provident fund and the employees' pension scheme. I had written against the latter when it was introduced in 1995. It was equivalent of a gratuity plus compulsory investment of that gratuity in government securities. The provident fund scheme provided a gratuity on retirement anyway; the pension scheme taxed the employer just like the provident fund, but deprived the worker of the right to manage the money himself after retirement. It was confined to workers earning less than Rs 5,000; so it administered small collections from an enormous number of workers. It was entirely funded by employers (with a subsidy from the government), so they would have a strong incentive to evade it. It was a bad scheme in every way. Now it emerges that because the pension is doled out in dribbles, and because employers cannot withdraw their contributions, it is a much better instrument of government borrowing than the provident fund. Thus on 31 March 2002, the provident fund scheme covered 27.4 million workers, whilst the pension scheme covered 25.5 million. But the corpus of the first was Rs 300 billion, whilst the corpus of the pension scheme was Rs 590 billion. It will not remain an instrument of compulsory borrowing forever; at some point it will start paying out more than it takes in. And at that point the government will have to subsidise it if, as OASIS claims, it is underfunded. Thus, both, the employees' provident fund and pension seem thoroughly bad ideas. So is the government contemplating their reform? On the contrary. According to A Vishwanathan, the Addition CPF Commissioner, the EPF has performed better than the Sensex over the last 20 years (that is because the Sensex has done so badly in the last ten years). According to him, the pension scheme has been valued four times, and none has revealed underfunding. So the CPF has no regrets; it thinks it has done a good job. In fact, it is planning to go from strength to strength. It thinks that by forcing in currently exempted employers, it can raise the growth rate of EPF from 5 to 20-30 per cent a year. It wants to give every covered employee a permanent social security number. It has accepted OASIS's concept of POPs. But it will not use post offices and banks; instead, it will allow access to accounts and funds at any of its 260 branches. It wants to set up a back office with a central computer, and a decentralised front office. Why stop there? It is planning to introduce unemployment insurance; for a further compulsory contribution, presumably on the employer, an employee will get unemployment benefits for a year if he loses his job. It wants to set up a pension scheme for casual workers, such as building labourers. It is looking at formulating special schemes for target groups, such as handicapped workers. For the CPF, the sky is the limit. The one thing Mr Vishwanathan did not mention was competition. Nor was giving the beneficiaries choice of investments, as proposed by OASIS, in his plan. Nor was evaluation of the quality of CPF's services. Why are so many taking all the money out of EPF they can? How difficult do they find getting their accumulated contributions on retirement? How long do they take to get them? What bribes do they have to pay? These are the questions that the government should ask - and get independently answered - before giving in to the CPF's imperial instincts. Powered by ALSO READ:
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In the report it published in January 2000, it said that in 1991, India had 314 million workers. Of them, less than 11 per cent - 11 million government workers and 23 million private sector workers - were covered by pensions.
