Social security at stake

Published : Apr 22, 2005 00:00 IST

The Left's opposition to the Pension Fund Regulatory and Development Authority Bill stalls "pension reforms", measures similar to which have proven deleterious to workers in many countries.


ON March 22, the Congress-led United Progressive Alliance (UPA) government, which was jubilant over the passage of the Patent (Third) Amendment Bill, received a rude shock when the Left parties walked out of the Lok Sabha over the introduction of the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005. It should not have come as a surprise as the opposition of the Left to pension sector "reforms" was a well-known fact. The Left parties have made it clear that even if the Bill is amended, they will oppose it. The Bill, which was introduced to replace an Ordinance introduced in late 2004, has now been referred to a Standing Committee chaired by B.C. Khanduri of the Bharatiya Janata Party (BJP).

The PFRDA Bill moots a defined contribution scheme where there are no assured benefits to a government employee on retirement. The overall logic for the New Pension Scheme (NPS) was provided in the Economic Survey 2004-05, which observed in the chapter on Public Finance: "Unfunded pensions have become a major fiscal drag worldwide. The pressure of pensions on Central and State finances is becoming increasingly burdensome."

The Bill is designed to provide a regulatory framework that is already under force since January 1 last year. On December 29, 2004, an ordinance was promulgated for the establishment of a statutory regulatory authority called the PFRDA to undertake promotional, developmental and regulatory functions in the pension sector. In brief, an enactment was needed to formalise the existing structure.

The PFRDA defines the "New Pension System" as a "contributory pension system referred to in Section 20 whereby contributions from a subscriber are collected in an individual pension account using points of presence and a central record-keeping agency and accumulated by pension funds for payoffs as specified by regulations". Section 20 states: "There shall not be any implicit or explicit assurance of benefits except market-based guarantee mechanism to be purchased by the subscriber" and that "a subscriber shall not exit from the New Pension System, except as specified by the Central government by notification." The statement of objects and reasons appended to the Bill noted that the NPS is mandatory for new recruits to the Central government services (except to the armed forces in the first stage).

The Government of India Report of the High Level Expert Group on New Pension System, February 2002, states: The difference between a defined benefit scheme and a defined contribution scheme is that the former is a pension plan in which the benefit formula determines the level of benefits. The formula establishes a link between benefits and contributions. These schemes are first-tier plans in most countries except where provident funds exist and are generally unfunded. The latter scheme is one where employees contribute to an individual account and the benefits on retirement depend on the balance in the account. These schemes are essentially fully funded and can be managed either privately or publicly. Investment risks are borne by the employee.

ALL the central trade unions barring the Congress-backed Indian National Trade Union Congress have opposed the Bill. W.R. Varadarajan, secretary, Centre of Indian Trade Unions (CITU), said that the proposal involves individual retirement accounts and suggests that the pensioner need not depend on government shares for maximising his or her returns but on the corporate equity market. "If this Bill is passed, there will be only individual retirement accounts, with the contribution defined and the benefits dependent on the yield on investments. The contribution is defined, not the benefit," he cautioned. And the risk of investments is not covered.

Pension reforms were mooted originally by the BJP-led National Democratic Alliance (NDA) government. The UPA government has given it fresh impetus. In the 2003-04 Budget, the NDA government had announced the introduction of a new, restructured, defined contribution pension system to be applicable in the first stage to new entrants to government service barring the armed forces. The NPS was introduced from January 1, 2004, for Central government employees recruited on or after that date. It would also be available, on a voluntary basis, to all, including self-employed professionals and people in the unorganised sector.

The World Bank too, in a 1994 Policy Research Report titled `Averting the Old Age Crisis', had initiated a global debate on pension sector reforms. In this report, the Bank chalked out a multi-pillar scheme to provide for old-age financial security. They are: a mandatory, privately managed, tax-financed pillar for social insurance; a mandatory privately managed, fully funded pillar for old age savings; and a voluntary pillar for those who want more protection in their old age.

Drawing from these broad prescriptions, a framework for reforms was established in three reports, The Project OASIS (Old Age Social and Income Security) Report of December 1999, the Insurance Regulatory and Development Authority Report on `Pensions Reforms in the Unorganised Sector' (October 2001), and the latest Government of India Report of the High Level Expert Group on New Pension System, also called the B.K. Bhattacharya report of February 2002.

The Bhattacharya report noted in its foreword: "The logic of the welfare state had prompted most of the developed countries to introduce increasingly liberal post-retirement benefits to their citizens. However, demographic changes in these highly industrialised and post-industrialised societies have made such pension commitments unsustainable in the long run. Pension reform has, therefore, now become a major public policy issue in most developed countries." The report, significantly, noted: "In India, there is no Social Security Pension System covering all sections of society. In spite of this, even the limited programme of providing pension to civil servants and public sector employees places an enormous burden on the limited financial resources of the government at the Centre, the States and the Union Territories. Doubts have also been expressed about the sustainability of the Employees Pension Scheme, which covers a segment of employees in industrial and commercial establishments." The report has not been made public; nor has it been placed for discussion in the Joint Consultative Machinery (JCM), a bipartite body with the representatives of Central government employees and the government. It was learnt that the JCM had opposed the NPS. The State government employees, who will be affected by the NPS, were not consulted either.

Varadarajan said that the Bhattacharya report, despite its overall thrust on drastic pension reforms, did not recommend a "defined contribution" scheme; instead, it suggested a hybrid or a mixed scheme wherein the employee and the employer make a matching contribution and the employee gets a defined benefit on retirement. It also recommended a voluntary savings scheme (Defined Contributions Scheme) to which an employee may contribute at his or her option, government's matching contribution being limited to 5 per cent. These contributions, constituting the second tier, would be invested under more liberalised guidelines. The NDA government, while notifying the NPS on December 22, 2003, did not conform to the recommendations of the Bhattacharya Committee, Varadarajan said. While the first proposal was the same as suggested by the Expert Group, the second option was that the government would make no contribution to this account. And the PFRDA Bill conforms to the parameters spelt out in the NDA's notification.

Project OASIS , headed by S.A. Dave, former Chairman of the Unit Trust of India, was constituted by the Ministry of Social Justice and Empowerment. It was the Dave Committee report that first came up with a proposal for a separate pension authority. Even at that point, the tripartite Central Board of Trustees (CBT) (which has employer, government and union representation) had at a meeting on February 8, 2000, chaired by the then Labour Minister, felt: "The report is investment centric and not social security or social insurance centric and contains a number of recommendations and suggestions, which are inconsistent with the ground reality or practical considerations." The CBT was of the unanimous view that the proposals in the report "would seriously jeopardise the safety and future savings of the workers as well as the whole concept of social security and social insurance".

It is not only a question of 40,000-odd government recruits, as the government claims are covered under the NPS. Unions aver that as one of the Terms of Reference of the Bhattacharya Committee was to "explore the option of moving existing employees to a contributory system", it is a matter of time before existing employees are also covered under the contributory scheme. Varadarajan said: "Instead of addressing the basic and more fundamental issue relating to social security, the widely talked-about social safety net and a National Social Security Authority, the UPA government seems to be more keen to push for an agenda of pension sector reforms which will spell disaster." He said that the Bill did not even talk about the first pillar of old age financial security suggested by none other than the World Bank, that is, a mandatory, publicly managed, tax-financed pillar for social insurance. The rationale for reform stems from what the government thinks is the burdensome pressure of pensions on Central and State finances. As it is, government statistics show that retirement benefits are available to only about 11 per cent of the population, including government employees. It is feared that even this will get diluted were the pension reforms to be introduced.

In a report titled `Pension Reforms in India: Myth, Reality and Policy Choices' the author Ramesh Gupta, a Professor at the Indian Institute of Management, Ahmedabad, poses the question as to who should bear the risk. He writes that the changeover from individual (funded defined contribution) accounts or a single collective fund with a defined-benefit formula involves a larger public policy choice issue, which is, who should ultimately bear the risk. The choice, argues Ramesh Gupta, would rest on which group the individual belongs to. Financially successful people may believe in individual ownership and choice, while low-wage earners may want assured returns because they do not have other resources to fall back on. Unfortunately, notes Ramesh Gupta, most Indians, unlike those in many other countries, are in the latter category, which cannot bear any risk, more so in old age. But the government does not seem to be listening. There is overwhelming evidence to show that internationally it is the financial industry that has much to gain, were social security to be privatised.

In an interview published in the International Monitor, Dean Baker, a co-director of the Washington-based Centre for Economic and Policy Research, commenting on the "partial collapse of stock market bubble" witnessed in the United States (the collapse of the NASDAQ or the implosion of Enron), said: "Those events have certainly taken a lot of wind out of the sails. People with Phds in economics and other advanced degrees, staffers for members of Congress and people who write newspaper articles on social security, really believed absurd things about the stock market. They really believed that they could get 20 per cent per year returns. Now they've been kicked in the face a bit, they realise the market can go both ways. There's much less enthusiasm. It has definitely pushed privatisation off the agenda for the moment." He also gave an account of the disastrous experiences of privatising social security in other countries.

Terming the experience as "from bad to disastrous", he referred to Chile, which had been a model of privatisation in the 1980s, and the United Kingdom, Argentina, Mexico and Kazakhstan. Warning against the privatisation of social security, he opined: "Privatisation means that, instead of having a defined benefit that is guaranteed by a central system or central fund, there will be individual accounts that will be privately managed. There are different ways that can be done. It can be done through a central system managed by the government or contracted out, or it could be done by people going to banks, brokerage houses, the financial industry in general. The main direction is that you'd be reliant on what you get from those individual accounts. You wouldn't have a guaranteed benefit that you have today. It would depend on how well your investments do, or how well they've done at the point you retire."

The working population of the country needs a social safety net. In an era characterised by heightened insecurity, the least the UPA government could do is not to add to this burden.

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