Creating a unified pension platform
INSIGHT
Asubstantial part of the reforms in the area of old age security have, perhaps, gone unnoticed. The transition of government employees to defined contribution from defined benefits about 15 years ago has been a major reform. During this period, the fund has grown to a sizeable AUM of about ~3.75 trillion and has more than three crore subscribers. The funds are managed by seven fund managers and its performance, when benchmarked against other comparable mutual funds schemes, has been noticeably good.
Recent reforms, aimed to enroll subscribers from the unorganised sector through government programmes like Atal Pension Yojana, are commendable. The regulators have also formed conducive regulations with tighter controls. One of the unique features of these reforms has been to mobilise, record and manage funds at very low costs per unit of funds under AUM. It might be the lowest globally. Various intermediaries have also contributed to keeping costs under control. They have approached their responsibility with a certain sense of social commitment.
Recent plans announced by the government and the regulator are important steps towards empowering subscribers. A thought weighing on the minds of policy makers now is unifying all pension programmes under one regulator and also create independent trust companies that undertake oversight of the intermediaries. This is a very significant reform aimed at benefitting subscribers. It is a major step in the right direction. The larger funds under their management will provide more room to incentivise intermediation and create more awareness, thus serving the subscribers better. The government and the regulator should perhaps consider possible measures in this direction. This will go a long way in covering the unorganised sector of the economy. The size of the funds offers the system some elbow room to push the pension products as a major alternative instrument for old age security. With adequate fiscal incentives, this can be achieved. In fact, reforms to encourage the lower sections of the economy in the unorganised sector to participate in old age financial security is key to the nation’s economic growth.
On evaluation of the various components of the NPS and EPFO architecture, besides other pension programmes such as coal miners’ pension, one notices that the cost of record-keeping is huge. It could well be more than half of the total cost. Some reforms around unifying the platforms that render such services would help in taking the financial performance of all the pension programmes to the next higher level of participation and coverage.
An excellent example of this is the unified payment platform offered by the National Payments Corporation of India (NPCI). It is a non-profit entity owned by the banks and offers a platform for a huge amount of transaction switch on a dynamic, real-time basis. It would be one of the most cost effective services when compared with any such platform worldwide. There are some unique features of the system. It is run on a no-profit basis to serve banks and the payment system. The system does not have multiple platforms for switching transactions between banks and customers. The Rupay card has emerged as one of the most successful stories worldwide. The service provided by Indian banks through this has empowered customers considerably. The pillar of this reform is a unified, cost-efficient and system-owned platform run on a no-profit basis.
In conclusion, policy makers and pension regulators could examine five major steps to unify the pension programmes. The first big task would be to create a single regulator and a uniform set of regulation. The fiscal incentives to subscribers, more than what we have presently, would bring the unorganised sector participants to pension programmes. This is the second reform recommended. The third one would be to reduce the cost by creating a unified platform for record-keeping and promotion of pension products, run on a non-profit basis. The fourth major step should be to have the trust companies conduct the awareness programme to equip subscribers to make informed choices. The last major step would be to strengthen the system with adequate risk management skills and introduce more financial asset classes and instruments for risk management.