 "Yogesh Agarwal")
Fresh enrolments to the Employees' Pension Scheme (EPS) should be stopped to enable the New Pension Scheme (NPS) to grow, says Pension Fund Regulatory and Development Authority (PFRDA) chairman Yogesh Agarwal. In an interview with Sreelatha Menon, he talks about the features of the NPS, as well as the future of pension plans in India.
Do you agree with Finance Minister P Chidambaram that the EPS, run by the Employees Provident Fund Organisation (EPFO), should be merged with the NPS, run by the PFRDA? He said EPS should be grandfathered.
I am fine with what the finance minister has said on the matter. How can I have a view contradictory to what he says?
The Oasis (Old Age Social and Income Security) report on pensions in 1999, which led to the birth of the NPS and the PFRDA, had suggested subsidy to the EPS be ended and employers' contribution be raised. But it did not suggest a closure of the EPS as the finance minister suggested...
The finance minister has the final word on the matter. The EPFO and the EPS are only for the organised sector, which is just nine per cent of the total workers. The rest of the 90 per cent are not covered by any pension scheme. The NPS was designed to offer pension to the entire population.
So why doesn't the NPS reach out to the rest of the 90 per cent of workers and cover them?
It will take time. Pension is a new thing as far as the Indian psyche is concerned. We are used to the old system, where the children and the joint family took care of the old. But that system is breaking down and people are living longer. In this age of consumerism, we have to make the youth realise that they have to start saving for old age. Historically, such a realisation dawns only at the age of 35 or 40, but our challenge is to make them start young, to change the psyche.
The NPS has a corpus of Rs 35,000 crore and the bulk of it is from government servants, while just Rs 5,000 crore has come from outside. Is it because the NPS does not have a mandate like EPS to expand?
We have a legal mandate, too. 850 corporations have already joined the NPS.
Do you think the Employees Provident Fund Act is a hurdle for your expansion since it makes it mandatory for people getting a monthly basic pay of Rs 6,500 to subscribe to the provident fund?
We can't change the law or force ourselves on anyone. Workers have a choice where to join. I can't pass a new law for this. What is possible is you don't enroll fresh subscribers under the EPFO.
But again, that would be just the organised sector of labour. What about the rest? Why is your outreach so slow? Swavlamban is barely known to the targeted poor...
It's a huge task. When the scheme was made, they did not make those distribution channels. So, these are still being formed.
The agencies who provide last mile banking are not so enthusiastic about Swavlamban. They complain of poor incentives...
They will understand that the incentives would grow as the corpus grows.
Questions have been raised regarding the hidden costs of NPS. The NPS charges PFM (pension fund managers) on the total balance of the account holder each year unlike the EPS, which charges them only on the fresh deposits each year. The subscriber of the NPS loses about four per cent of his or her entire asset just in these charges.
That's the way it is done all over the world. We follow it and it is a valid system. The OECD (Organisation for Economic Co-operation and Development) has rated the NPS as the second cheapest pension product in the world taking into account the charge ratio.
But is it not more expensive than the EPS?
You can't compare apples with oranges. One is a government-subsidised scheme, the other is self sustaining. In the case of the EPS, whenever you are short of money, you can go to the government and get what you want and can then afford to do without processing charges. But we make up for the cost with higher returns.
The EPS provides social security and is not just savings. If a worker dies even after a day's duty, his wife and children get pension. What social security does the NPS offer?
Who says there is no widow's pension in the NPS? It's the choice of the pensioner. If he wants pension to continue after his death, it's up to him. He has been given a choice of several schemes and modes of investment. As for widow's pension and free insurance cover offered by the EPS, that is unsustainable. If you want freebies and doles, then it's a different matter. Ours is a self-sustaining scheme.
But what about a worker who has been there for just one day?
These are freebies available to a few, the organised labour force, which is just nine per cent of all workers. So, whose social security are we talking of? It's limited to a privileged class. And this privileged class wants the freebies to continue, while the rest of the workers get nothing.
Is there a minimum rate of interest guaranteed to NPS subscribers?
We don't provide guarantees. But for the risk averse, people can choose where to invest. If you invest 100 per cent in government securities, you get full guarantee.
Besides, the guaranteed returns that the EPFO promises is a system abandoned globally. World over, people are moving to a defined contribution rather than a defined benefit system as the latter has been found to be unsustainable. Pension is being paid from current year's revenue and it is going up every year. How long can you sustain it?
What is the difference between the NPS and the pension schemes offered by Life Insurance Corp of India (LIC) or mutual funds (MFs)?
We can give better returns as our costs are low. LIC charges 30 to 40 per cent. The average cost per year is eight per cent, while mine is less than half a per cent. MFs also can charge between two and three per cent per year.
What's the most appealing feature of the NPS, apart from the returns?
The brilliant use of technology to enable portability allows the scheme to be unique. So, workers who change their employers still continue with the same account number in the NPS. In the case of other schemes, exit is not easy and reconciliation of amounts is not there. So, the worker cannot benefit from the power of compounding.
It's said the NPS, though a pension scheme, does not provide pension, since it asks the subscriber to buy any annuity available in the market with 40 per cent of the savings. Already, pension schemes are shrinking in number in the market. So, what annuity scheme would be available 10 years from now?
The NPS provides seamless portability into the best available pension options. The subscriber does not have to worry about it at all.
