Building a halfway house

The Congress and the CPI(M) are trying to arrive at a middle path on pension reforms. The New Pension System has been introduced for all new recruits into the central government from January 2004. Many state governments have adopted it, though West Bengal (which is one of the worst off in this regard) has not. For these new recruits, a deduction of 20 per cent of salary every month has been taking place, half of which is paid for by the government.

The New Pension System (NPS) has been widely heralded as one of the world's best pension reform efforts, one that puts India on a sound trajectory for coping with the demographic transition of the next 50 years. Three things are now lacking in the NPS. First, the full institutional structures required for translating the promise of the NPS into a reality are, as yet, lacking. Second, the system lacks a properly empowered regulator. India's financial architecture appears to be headed towards four regulators""covering banking, securities, insurance and pensions""but as yet, the Pension Fund Regulatory and Development Authority (PFRDA) lacks teeth. Third, the NPS has yet to be thrown open to large-scale participation from the unorganised sector. This feature is particularly important in the light of progress in recent months by UTI and Sewa Bank on obtaining adoption in the unorganised sector.

As yet, it is not clear what kind of bargain the ministry of finance will be able to strike. One possibility that is talked about is where pension fund managers will only invest in government bonds. This would be a disappointing outcome, for it would give workers poor returns, and merely convert a hidden liability of the government"" of paying pensions""into an explicit liability of the government, of repaying bonds. Another possibility that is talked about is giving customers the choice of one scheme which invests purely in government bonds. Such a choice is perfectly reasonable, and would cater to the risk preferences of some people. Another possibility involves restricting the NPS to public sector fund managers. Judging by the progress that India has made by introducing private firms into telephony, airlines and banking, customers of the NPS are likely to be unhappy if they are forcible customers of public sector pension fund managers. As with telephony, airlines and banking, customers should have the choice of buying from a PSU, but should not be forced to do so.

The full implementation of the NPS has been greatly delayed. For an effort that involves thinking for 50 years, the next general elections are not so far away. The singular event of 2004, where the CPI(M) got a veto power over all legislation, may not arise after the next elections. Hence, as this newspaper has argued earlier, the wise strategy involves implementing the NPS""this involves building recordkeeping, signing on states, and recruiting fund managers. An implementation of the NPS without the PFRDA Bill would be unfair to workers since regulation would be relatively toothless. But it would be better than compromising the long-term security of workers by enacting a flawed Bill. India would be better off if a well-functioning NPS is bequeathed to the next government, which would then be able to pass a well-drafted PFRDA Bill.