Understanding Micro-Pension Arrangements: A Series of Mickles and Muckles as Stuart Rutherford Would Call It…

Ramesh S Arunachalam

Rural Finance Practitioner

In very broad terms, micro-pension is any arrangement[1] that builds up assets for old age income of poor people. As shown in figure 1, a typical micro-pension product is typically designed as a defined contribution scheme. The product is basically a long term voluntary savings product accumulated over a long period to yield returns at a later date. These savings are typically managed by a professional fund manager and invested appropriately in financial/capital markets. At a pre-agreed withdrawal age (58 - 60 years), the accumulated balance can be withdrawn in a lump-sum, phased withdrawal, annuity or some combination of these methods.

As one industry observer remarked on micro-pensions, ‘India needs a micro-pension scheme, which achieves the above objectives for low-income people and with the following characteristics:

·       Self-sufficient and sustainable;

·       Universally accessible, especially to the uncovered large numbers of unorganized sector workers on a voluntary basis;

·       Affordable, efficient and available throughout the country;

·       Equitable, pro-labour and pro-poor; and

·       Well-regulated in an appropriate enabling environment.’

A generic design of micro-pensions is described in Figure 2.

---

[1] Reverse mortgage is also equivalent of a pension product.