has been the lynchpin for several Budgets, and as the Budget Officer, he was familiar with the background of each and every proposal in the annual exercise. Today, Swarup, who has just retired as expenditure secretary, has been catapulted into an entirely new role "" that of fixing the rot in the country's pension system and enlarging its scope to a meaningful level.
The future of the New Pension System, however, hangs on a thin thread, and depends upon whether Parliament passes the Pension Fund Regulatory Development Authority (PFRDA) Bill.
Excerpts from an interview with Business Standard:
Is the current system of pensions near broke, or can it be fixed, as the Left says?
The unfunded portion of the Employees Pension Scheme is estimated at Rs 19,000 crore and is getting bigger each year. I don't know how the EPF can continue to pay such high returns.
As for the government pension scheme, these have risen five times in the past 10 years and account for around a tenth of tax revenues already.
What about the coverage of the pension system?
It's quite dismal. India has 424 million workers and just about 120 million of them are covered by some form of pension, according to an all-India survey done for the ministry of finance.
Indeed, the same survey showed that of those not covered by pensions, just 2 per cent had enough savings to generate an income equal to half their current expenses. This is clearly unacceptable.
How will your pension schemes address this?
We will choose banks/ post offices, basically organisations with an all-India footprint, as points of presence (PoP). People will deposit their money at the PoPs and this will be transferred to the Central Recordkeeping Agency (CRA), which is something like today's share depository.
Simultaneously, there will be several pension providers who will have different investment plans, and individuals will just tell the CRA which one they want.
So, they can put their money with Fund Manager A's plan X, and as soon as they wish, these funds can be transferred to Fund Manager B's plan Y.
Individuals will have a choice over where their pensions should be invested, and unlike mutual funds, there may be no entry or exit loads.
Estimates based on our survey show that 20 million people will join the New Pension Scheme immediately and the number could double over the next few years.
The new pension scheme for government employees has already got around 1,00,000 people. Apart from the Central government, nine states have notified the scheme and six others have decided to opt for it.
I think all states will finally shift to it "" they're just waiting for the law to be passed.
My plan will be flexible. For instance, look at a farmer. Instead of paying his monthly premium quarterly or annually for an insurance scheme, he can pay his contribution when he has the money.
He can also choose the amount that he wishes to invest. There will be a unique account number and he can pay from anywhere in the country, and the amount will be credited to his account.
This is aimed at those 310 million who have no pension cover and don't know how to get one, how to invest in a mutual fund, or a G-Sec. Do you know how to buy a G-Sec today?
Isn't that expensive? After all, collection costs will be high for remote rural areas, for instance.
That's why the PoPs have to have a pan-Indian footprint. With technology, the costs come down dramatically.
Today, the EPFO has a transaction cost of about 4 per cent (for every Rs 100 deposited by individuals, just Rs 96 is invested in their name), but we will get fund managers to bid for this "" the one with the lowest transaction cost will win.
Over time, this transaction cost will fall too "" it is as low as 0.25 percent in some countries.
But aren't you forcing people to invest their money in stocks ... they don't even understand the markets.
Not at all. First, all pension funds will need to have a zero-risk option that will be G-Secs, AAA-bonds and so on, and so individuals can always opt for this.
Indeed, the default option, that is, when people don't know which pension plan to opt for, will be the zero-risk one. You'd be surprised to know that in the US, 85 per cent of pension monies are invested in risk-free securities.
We will, of course, also have an advisor to help individuals decide on the kind of plans they should invest in.
Once you invest pension funds in the stock market, it could be invested in all manner of companies, couldn't it?
No, not true. Even the high-risk pension plans will not have the liberty to invest in individual companies the fund manager may wish to. All funds will have to be invested in an index like, say, the Sensex, the Nifty, or maybe a technology index of the NSE or the BSE.
So, fund managers will have to invest in only those stocks in the index and in exactly the same proportion as their weight in the index.
If you want to invest in tech stocks, for instance, you cannot invest in just an Infosys or a Wipro "" you have to invest in all the tech stocks in the NSE tech index, if that is the one the PFRDA specifies.
Empirical evidence suggests that there is little danger of losing money on an index over a long enough period.
Does investment in risk-free securities provide an adequate pension cover?
Generally speaking, if an individual contributes 10 per cent of his salary, and this is matched by the employer for 35 years, you get enough to give you half your last salary as a life-long pension.
Shouldn't the FDI in pensions be higher than what is currently proposed? After all, the pension funds need high capital adequacy and that requires more funds...
The PFRDA does not decide on FDI, but I would suppose the rules wouldn't be too different for pensions since this is somewhat similar to life insurance.
When will the new pension schemes be ready?
Soon after the Parliament okays the bill, we will have our regulations ready after having got everyone's comments. We are already working on it. The first set of licenses will be issued thereafter.
Who will be the CRA?
It could be anyone, NSDL or anyone else. We can have one CRA or more. The basic criteria will be presence across the country. And, of course, the capability and the experience.
How will the CRA decide on the fund manager?
The fund manager will be decided by the subscribers and the CRA will only credit the amount to the fund manager and the scheme selected by the subscriber.
There could be three schemes. Scheme A could be a fixed-income scheme that invests only in government securities. Scheme B could be predominantly fixed with some equity element and scheme C could be more equity.
We don't intend to risk weight the schemes but in due course, we propose to provide financial advisory services to the subscribers in the PFRDA itself.
