Pension bomb

For the millions who felt let down when their savings were lost through UTI, there may be more bad news in the form of a pension bomb that's waiting to explode.

As reported by this newspaper yesterday, the Rs 33,200-crore Employees' Pension Scheme (EPS) already has a cash hole of Rs 1,700 crore.

With interest rates on government paper falling each year, the hole will get larger because there has been no commensurate change in the benefits promised "" which is, to pay a pension of around half the last salary drawn by members at the time of their retirement.

Two outcomes are certain unless the scheme is dramatically overhauled. One, the government will be left with a huge gap which it will have to make good.

Or, as some reports suggest, pension fund managers will resort to more risky investments to make good the implicitly high returns promised in the scheme. That in turn could make the problem get worse. While the scheme is evaluated by an actuary, no details of these calculations are made public for other experts to examine.

While it is yet to be seen what steps the government will take on the matter, it is known that in April last year a senior official from the finance ministry, while making a presentation in Colombo on social security and pensions in India, talked of the "non-sustainability of pension schemes such as the EPS".

It is for this very reason that the government has reformed the pension scheme it runs for its own employees "" from January this year, new employees do not have access to the old-style pension plan that guaranteed half of the last drawn salary as pension.

Instead, they will have a pension that will depend upon the returns that pension fund managers are able to get on their portfolio. This is in line with the global pattern where you move away from a defined benefit to a defined contribution.

Interestingly, the always responsible Left-affiliated trade unions have asked the Finance Minister P Chidambaram to do away with the new scheme!

Meanwhile, an area that the government needs to focus on is social security for the unorganised sector. The scheme that the NDA government came out with, as this newspaper pointed out at the time, is another bubble waiting to burst.

Under the scheme, being run on a pilot basis in 50 districts, unorganised sector workers and their employers are to contribute a maximum of Rs 200 per month for 30 years and get Rs 500 per month as pension after the age of 60. While this scheme is viable if you go by the actuarial calculations, it is riddled with holes.

For one, the scheme envisages a service cost of just 1 per cent of deposits while this runs between 3.5 per cent and 4 per cent for the EPF today.

Since, unlike the EPF, the deposits will be much smaller from the unorganised sector, the service costs will naturally be even higher, perhaps between 7 per cent and 8 per cent. In other words, there will very soon be a hole in this corpus as well, if it is allowed to run in the form originally envisaged.