Action, 10 years later

The reform of the pension system has achieved two important milestones. First, after an unfortunate delay induced by the Securities and Exchange Board of India (Sebi), the contract for the Central Recordkeeping Agency has been signed with the National Securities Depository (NSDL). The administrative competence and computer systems of NSDL are now of supreme importance in making the new pension system (NPS) work. In many other countries, well-meaning pension reforms have floundered because of weak administration. While NSDL has a strong track record of running large and complex computer databases, record-keeping for the NPS is a daunting task. The devil lies in the details of rounding up information for central government and state government employees from all over the country, creating accounts for them, delivering their money into the relevant accounts, and getting account balance statements back to them.

The most important MIS reports that NSDL and the pension regulatory authority should be releasing every day to the Press consist of two numbers: How many accounts are in place with full reconciliation, and the assets to be found in these accounts. This graph will portray the success of rolling out the NPS. Four factors will be at work in shaping the graph. First, how quickly is the NPS extended from the central to the state governments? Second, how quickly is the backlog of past recruits taken into the new administrative system? Third, there will be an ongoing process of new recruitment which will steadily accrete the number of NPS accounts. Finally, returns on pension assets will swell the total assets in the NPS. Within two to three years, it is possible to get the NPS past a million accounts and Rs 5,000 crore of assets, at which point it will be a significant pension system by international standards.

The second major announcement that has been made is about fund managers. Earlier, the pension regulator had announced that UTI, SBI and LIC had been recruited through a competitive bidding process that was restricted to public sector bidders. Now, the regulator has announced that the prices that will be paid to this trio of pension fund managers range from 3 to 5 basis points of the assets under management, and will reflect the sum of fees and expenses. By way of comparison, mutual funds in India charge over 100 basis points, and insurance companies charge even more. Compared with these benchmarks, price points of 3 to 5 basis points are a very good achievement. The NPS has delivered on the promise of auction-based procurement obtaining very low costs when compared with the private retail market. At the same time, these bids are higher than the 1 basis point level that is visible internationally. It is to be hoped that, as the assets of NPS build up, and when private competition comes in, these prices will drop further.

In December 1997, or 10 years ago, the ministry of social justice tapped Surendra Dave to head Project Oasis, which designed the New Pension System. It has taken 10 years for the idea to wind through the complex policy-making processes of India, across both NDA and UPA administrations, to get to this starting point where ideas are now turned into execution. Over the next 10 years, the goal of the NPS should be to get to 100 million accounts, so as to make an important dent in the problem of India's ageing workforce.