Evaluating pension plans

Doing this for the entire population is expensive

Given that over 90% of the country’s workforce is in the unorganised sector and is likely to be bereft of any pension/insurance cover, the labour ministry proposing a universal cover by 2030—as part of its vision statement—seems an admirable goal. Except, it needs to be carefully thought out as the costs can be crippling. Keep in mind that while government bureaucrats are quite a small number, the generous pension plans for them proved very expensive, which is why the government also moved away from the defined-benefits pension to a defined-contribution plan several years ago. If PF/pension plans are defined-contribution ones, they are obviously not a burden since the retirement payout and pensions are all based on the money earned on the contributions made. Obviously the choice of PF/pension cannot be restricted to the EPFO, but has to be opened up to the New Pension Scheme since that also offers, at the moment, higher returns. That this requires the tax treatment for both schemes to be the same is equally obvious.

Matters, however, get problematic when there is an element of a definedbenefit. The EPFO, for instance, has a pension component fixed at half the last salary drawn subject to a ceiling, right now R 6,500 per month. While that may be viable right now, what happens when life spans rise as they are? Also, when politicians want a minimum pension—R3,250 fetches little, after all—the problem gets magnified. Doing this for a few crore persons, as now, can be funded but how do you do it for 50 crore persons—it helps that there are far more contributors today as compared to those drawing pensions, but the scheme will be a real problem when the situation reverses as it will with an aging population. The issue of how contributing to pensions takes a lot out of the salary of low-paid employees also cannot be ignored, and it needs to be kept in mind that regular collection of pension contributions is a difficult task when the bulk of the labour force is in the informal sector, may not have regular jobs and is also migratory. Insurance of the sort started by the prime minister recently is equally tricky. While it is desirable, it needs to be seen how viable it is, and that can be seen only after several years when insurance companies deal with the medical and death payouts—whether the numbers are good or bad, they will look a lot worse as the population ages. Once again, the numbers here are critical—funding losses is easier when the numbers insured are small. While desirable and politically popular, pension/insurance decisions require a lot of actuarial homework—it is to be hoped the labour ministry has done that.