Trends And Developments

Politics of Pensions Privatisation

Differing ideological perceptions over privatisation of pension funds in India, which have been keeping comprehensive old age pension reforms on the back-burner for years, once again came to the fore on January 22 when the Prime Minister and his top economic ministers discussed the matter with Chief Ministers and State Finance Ministers.

In the prevalent multi-party scenario across States, it was effectively an all-party meeting on a key issue of economic reforms pertaining to retirement benefits not just for employees of government-run enterprises, but also for workers in the organised private sector and, at least in theory, the millions of wage-earners in the unorganized sector.

Different political parties and different State governments have for long held almost irreconcilable views on the matter. But, judging from the latest deliberations, it appears that some form of consensus could be emerging.

That, at least, was the refrain of formal speeches and presentations. But the Left parties, who see themselves as allies with clout of the federal UPA coalition, continue to stoutly oppose the pension reforms plan put forward by the Central government. Not surprisingly, the alternate road map suggested by the CPI(M) and the CPI have no takers among the government reformists.

Virtually indicating that he was inclined to go ahead regardless of Marxist murmurings, the Prime Minister, Dr. Manmohan Singh argued that there is a lot to be gained by moving forward and allowing many pension products delivered by a variety of agencies – both public and private.

In his address to the Chief Ministers' Conference on Pension Reforms, Dr. Singh pointed out that India does not have a comprehensive social safety net focusing on old age income security covering the bulk of our population. He said: ”One major objective of the PFRDA Bill is to put in place the architecture and the delivery mechanism for pension schemes of these kinds".

Dr. Singh stressed the need for better management of pension liabilities so that State finances can be managed in a healthy, sustainable way. He warned that the rising pension bills would be increasingly difficult to finance in future, particularly when large sums of money need to be spent on social sectors such as health, education and rural development. "The new pattern will fetch a return superior to that given by the government at present without compromising the safety factor," he claimed.

In essence, what the Prime Minister was recommending was that a new pension scheme for government employees should be legislated to allow investing a portion in stock markets to improve returns.

This was echoed and elaborated by the Finance Minister, Mr. P. Chidambaram, who said the rules governing non-government funds would be adopted for the proposed new pension fund. (Currently, only private pension funds can invest up to 5 per cent of their corpus in equities).

"Pending the passage of the bill, it is necessary to adopt an interim model for investment of accumulated subscriptions", Mr. Chidambaram told the Chief Ministers. "Hence it is proposed the investment guidelines applicable to non-government Provident Fund may be adopted as the interim model," he said.

Even though many States do seem to be veering round to the view that there is need for hastening the pension reforms through passage of the pending legislation with some modifications, the Left parties continue strongly opposed to any investment of pension fund money of government employees in the stock market.

The Finance Minister of West Bengal, Mr. Asim Dasgupta, said the three Left-ruled States diaapproved of the proposed new pension system because it would allow long-term savings to be invested in equities, without offering any guarantee of assured returns.

But Mr. Chidambaram also drew attention to another aspect – making pension instruments and schemes available for the common man. He said India would face huge challenges in future due to ageing of the population. The life expectancy at age 60, which is around 16 years at present, is expected to rise rapidly, requiring longer periods of retirement support for the elderly.

This becomes particularly acute for the unorganized sector, which is by far the major employer of our labour force. This large labour force functions without any options for their old age.

Incidentally, whereas the number of persons employed in the organized sector in India is about 50 million, the number of persons employed in the unorganized sector - and this includes casual and temporary employment - is estimated at a staggering 310 million. Of this large workforce, only about 11 per cent, including Government employees, is covered under any kind of pension plan.

It is estimated that one-eighth of the world's elderly population lives in India. The number of persons over 60 years of age today is 90 million and this number is expected to rise to 175 million by the year 2030.

The question that faces every country, especially ageing societies, is how can the elderly be provided for in the last years of their lives? The answer is - a reasonable and affordable package of retirement benefits that includes pension and health care.

But until the political parties sort out their ideological differences, it seems difficult for the government to move forward in a meaningful manner to put into place a comprehensive old-age pension scheme which can benefit people from all sections of society.

According to some expert studies, the debate is essentially over some crucial details.

Firstly, whether India should shift from the current system that defines benefits, on the basis of safe assets, to a new system that defines in which benefits depend on investments of the pension funds. The government says the current system cannot continue for long because of fund shortfalls, which will bankrupt many State governments. The combined pension expenditure of all States has risen from Rs. 3,131 crore in 1990-91 to Rs. 41,660 crore in 2005-06 (BE). While pension expenditure of States as a percentage of tax receipts was 7 per cent in 1990-91, this proportion rose to 14 per cent in 2005-06. Assuming a continuation of the trend, projections indicate that pension expenditure of the Centre could reach Rs. 35,020 crore by 2009-10. For the States, the projected figure is as high as Rs. 65,081 crore by that year.

Secondly, whether pension funds should be allowed to invest in stock markets. Proponents of reform say yes, pension funds should take on higher risk in the hope of higher returns. Opponents say no, this will harm the poor pensioners, if the investments prove unprofitable.

Thirdly, whether private institutions should be allowed to manage pension funds or government bodies should keep their monopoly. Both sides have done much math to support their respective cases, and both cite instances from other countries that have succeeded or failed with pension reforms. (Japan even had an election with this as the focal issue).

The path of India's pension reform over the last nine years has been riddled with many complex actions, reactions and inactions at the level of policymakers, researchers, regulators, aid agencies and the financial community. However, despite an overwhelming political consensus, the PFRDA Bill has continued to languish in Parliament over the last six sessions.