Setting a tough goal

The provident fund has failed to deliver what it was set up to provide—inexpensive and effective social security for the organised sector.

Amit Gopal
Amit Gopal, Pension Consultant

From April 2009, the Pension Fund Regulatory and Development Authority (PFRDA) will allow individuals to contribute to the New Pension Scheme (NPS). The NPS promises to deliver long-term retirement savings under a regime that is transparent, permits choice in asset allocation and is significantly cheaper. Here’s a look at the possible long-term impact of the advent of PFRDA and NPS on the existing pensions structure in the organised sector.

Single and unified regulator: Corporate retirement plans are governed by at least three regulators—all of whom have multiple and often divergent objectives. This results in regulatory arbitrage and licence raj. The solution lies in a unified regulator. This can be done by PFRDA as it comes with a clean slate and already has a defined contribution structure in place.

Clear roles: What ails EPFO—the largest corporate retirement benefit in India—is not the absence of equities in asset allocation but the confusion about EPFO’s role. It is a regulator, enforcer and administrator bundled into one. This confusion has resulted in the provident fund becoming a compliance issue instead of a retirement saving. It has also failed to create an inexpensive and effective social security for the organised sector. Unbundling these contradictions could take place only with a regulator whose focus is design and architecture, independent of an administrator(s).

New design and regulation: The design and structures of retirement plans in India stem from regulation that is similar to the one during the licence raj era. Corporate India can rarely implement some of the much-needed reforms on account of archaic, and often absent, regulation. A host of changes are imperative in the current context. Employee-anchored pensions, employee choice in asset allocation, stronger regulation governing plan trustees and definitive regulation governing benefits during M&A are some points on the agenda.

Are NPS and PFRDA the cure for all that ails occupational retirement plans? I think not. The NPS will have its own challenges—meeting the expectations of the employees and members, and dealing with financial illiteracy. But as the current occupational pensions in the organised sector are not delivering value to both employees and employers, it is important that the changes are carried out urgently.