Sunil Jain: What's stopping the pension bill?

RATIONAL EXPECTATIONS

Most assume the Left parties' opposition will ensure the government won't bring the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which will allow millions to actively save for their post-retirement life. This may be true but it's worth keeping in mind that in 2004 itself the government removed the biggest irritant in the Bill's passage "" the government servants! From January 2004, it was made mandatory that pensions of all new government recruits would depend on what they contributed as opposed to the current practice of the government guaranteeing they'd get pensions equal to half their last salary. Since then, around 800,000 new government employees at the Centre and in 19 states have started contributing to their pensions. To that extent, much of the Left's sting has already gone out "" no one's forcing the pre-2004 employees to move to the new pension scheme and the new ones have got used to not having the old scheme.

But what's so special about the PFRDA Bill? Today, if organised sector workers like me want to save for pension, my employer deducts 12 per cent of my salary, contributes and equivalent amount and deposits it with the Employees Provident Fund Organisation (EPFO), which invests it towards my retirement plan. Of course, the way things are today, I can't decide who'll manage my money "" the fund manager appointed by the EPFO or Reliance Capital, or whoever. But even this restricted EPFO facility is limited to just 10-12 million people. No one in the unorganised sector can have such an account "" sure, you can deposit 24 per cent of your salary in a mutual fund/bank every month, but it's easier if there's a system in place that does it automatically. How many people do you know who go and deposit a fourth of their salaries each month in a mutual fund? 
 

SORRY, CAN'T GET PENSION (number of people wanting to save for pension)
	2004		2007
	Number in mn	Annual  Contribution in Rs cr	Number in mn	Annual Contribution in Rs cr
Unorganised Sector	30.90	38,490	42.60	73,645
Organised Sector	na	na	19.60	13,220
Source: IIMS Dataworks, 2007

Once the PFRDA Bill comes through, there will be a Central Recordkeeping Agency which, like the NSDL does for shares today, will maintain all our records. You and I will go and deposit our savings in a bank/post office (or instruct our employers to do so), instruct the CRA that the money has to be given to Reliance Mutual Fund each month and perhaps change our mind to say it should be given to SBI or whoever, based on their annual performance "" the CRA, in turn, will keep track of how our money is growing.

According to Invest India's survey across the country, a total of 31 million unorganised sector workers wanted to join such a plan in 2004 "" Invest India explained the features of a pension plan to people in their sample to canvass their opinion. In 2007, this number rose to nearly 43 million, willing to provide an annual corpus of Rs 73,645 crore. For the organised sector, this information wasn't asked for in 2004, but nearly 20 million workers were interested in 2007 "" the amounts they were willing to contribute (Rs 13,220 crore) were smaller as most already have some sort of retirement savings and just wanted to top it up.

So, once Parliament passes the bill, all these people can go and sign up with the CRA. But perhaps there's a need to review the CRA charges once this happens. Today, NSDL charges the central government Rs 50 as the opening fee per member, Rs 10 per transaction made and an annual account administration of Rs 350 "" assuming 14 transactions a year for government employees, that's a fee of Rs 540 in the first year and Rs 490 thereafter. (That generates fees of around Rs 300 crore over 10 years for NSDL assuming 250,000 employees in year one, going up to a million by year 10 "" that's a net present value of Rs 165 crore!)

This is too high if millions of workers are to join up since, if a worker saves Rs 5,000 a year, he can ill afford to give a tenth away each year to the CRA "" for the average per capita contributions of Rs 17,000 in the unorganised sector, according to the Invest India data, the cost works out to an astounding 2.7 per cent for just recordkeeping. The pension authorities in charge of government pensions have done a great job in getting fund managers to charge fees of 0.03-0.05 per cent of assets being managed, now they need to apply the same rigour to CRA charges. Otherwise there's little chance of non-government pensions taking off for small savers.