Ramesh S Arunachalam
Rural Finance Practitioner
The time for pension reforms with a role for the State as a facilitator, in creating new institutions and in fostering their sound functioning, especially with a focus on micro-pensions is perfect. The key features of such a system would include:
1) Scalability: A scalable system, which would work for the Central, State and Local governments and more importantly for the larger numbers of unreached people, especially the low income men and women
2) Outreach: Institutions and policies need to be so designed that they cater specifically to the needs of the large mass of financially unsophisticated, who are presently non-customers of the financial sector, engage in small value transactions, and have very very small bits of wealth.
3) Fair play and low cost: The design should ensure the highest levels of transparency, governance, competition and sound policy making.
4) Choice: The design should be highly transparent, and foster individual choice across multiple competing pension fund managers, alternative investment styles, multiple competing annuity vendors.
5) Sound regulation: The reform effort should create modern investment regulation, which will single-mindedly focus on maximising the welfare of low income participants in old age.
6) Sustainability: India has substantial experience with funding difficulties - ranging from the railways pension, to the Employee Pension Scheme (EPS) of the EPFO, the “assured returns” products sold by UTI, and failure of banks. Pension reforms must therefore have the norm of using defined contributions, where the wealth of a participant is driven purely by net asset value (NAV), and avoiding assured returns, subsidies, guarantees, or liabilities for the government, and
7) Coverage: It is highly desirable to find ways to reach the vast uncovered unorganized sector, going beyond the existing labour force covered by the TCSP and the EPFO.
Table 1 below summarises key lessons from the Microfinance/Micro-insurance/Micro-pension industry on building efficient and effective micro-pensions in India, with a specific focus on roles for various stakeholders
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