Upscaling Micro-Pension Products in India: Strategies and Critical Issues For Consideration[i]…

Ramesh S Arunachalam

Rural Finance Practitioner

The future of micro pension, as a distinct stream within micro-finance, depends on several actions and aspects and these are outlined below

First, if micro-pensions are to be added as a service (through MFIs), the highest standards of governance, systems and management, transparency would be required of such MFIs. The focus would be on enhancing the quality of governance, financial and accounting systems, MIS, record keeping internal audits, risk management and several other aspects.

Regarding governance, all institutions involved in micro-pensions must be required to follow highest standards of Corporate Governance[ii] including specific disclosure norms. The following practices could be viewed as critical elements of any client oriented governance process, which is very critical, when offer micro-pension services:

þ   Establishing strategic objectives and a set of corporate values that puts clients first and ensuring that these are clearly communicated throughout the organisation.

þ   Setting and enforcing clear lines of responsibility and accountability throughout the organization and especially with regard to the aspect of putting clients first.

þ  Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns. Under no circumstance should the board engage in any action that could be at variance with the aforementioned value of putting clients first

þ  Ensuring that there is appropriate oversight by senior management and specifically with regard to client related issues.

þ  Effectively utilising the work conducted by internal and external auditors, in recognition of the important control function they provide and ensuring that their recommendations are indeed acted upon.

þ  Ensuring that compensation approaches are consistent with the institutions ethical values, objectives, strategy and control environment and more importantly, with the larger objective of putting clients’ first. This implies voluntary caps in compensation and the like

þ  Conducting corporate governance in a transparent manner with public disclosure in the following areas:

a.   Board structure (size, membership, qualifications and committees) and composition (independent versus other directors);

b.   Senior management structure (responsibilities, reporting lines, qualifications and experience);

c.   Basic organisational structure (line of business structure, legal entity structure);

d.   Information about the incentive structure (remuneration policies, executive compensation, bonuses, stock options) etc;

e.   Nature and extent of transactions with affiliates and related parties[iii]

Second, micro-finance institutions and non-governmental organizations must alter their perception of pension funds as sources of long-term capital for institutional use because this puts elderly client benefits at risk. Micro-finance is a volatile business with significant covariant risk in livelihoods of poor people and redeploying pension contributions for internal lending must be avoided at all costs. Otherwise, the hard learned money of poor could be lost.

Third, at client level, by and large, the level of financial literacy is rather low with regard to:

a)      Old age savings

b)      Estimating the lump sum required

c)      Functioning of mutual funds

d)      Facilities of modern financial markets

e)      Making investment decisions

f)        Understanding inflation

g)      Other financial planning knowledge, and

h)      Related issues

Hence, to create a natural demand and ensure a good future for micro pensions, the staff of the MFIs, NGOs, Banks and field workers/assistants associated with SHGs, must be able to explain ideas of financial planning, risk, yield and all above aspects to poor clients, in an easy and transparent manner. So, capacity building in the above areas would be required for most, if not all, MFIs. This is an area for future work that would need to be attended to widely before micro-pensions can be seriously distributed by MFIs and/or equivalent organizations.

Fourth, at the level of individual MFIs, a very significant improvement in record keeping and MIS, with a focus on individual record keeping would be required. This apart, MFIs must re-orient themselves towards servicing individuals rather than just providing financial services to JLG or SHG members. This will certainly call for a change in attitudes, processes, policies and other aspects and institutions that offer voluntary savings services and have an individual lending component would be at a distinct advantage

Fifth, a wide range of stakeholders need to be incentivised to support the micro-pension process so that maximum value accrues to the low income people. An important step here lies is in reducing management fees and costs through auctions and other competitive mechanisms. Further, actions like proactively educating a large proportion of the population about the need for savings, old age security and pension, must happen simultaneously. All this must, of course, be backed by simpler products and schemes, competitive offerings, leveraging of technology and high quality of services/services delivery. This alone can help scale up micro-pensions in India. All of this may require strong political will backed by administrative, financial and infrastructure support.

Lastly, it seems prudent to sign off by pointing out several learnings from the micro-finance sector for micro-pensions (and their introduction) and this is done below. While upscaling micro-pensions, it seems important to recognize and address contextual factors, in India, such as the following:

·     The large size and diversity of the country is a critical aspect and any micro-pension product would have take into account social, cultural and economic factors as well as infrastructure available – it must also be noted that these vary considerably across various regions in India

·    The division of power and responsibilities between Centre and States in many ways impedes implementation. This has to be better understood and accounted for in any product for the poor and micro-pension is no exception. The current AP situation is in fact a clear example. Also, because pensions represent a net outflow of money from low income people to institutions, greater care has to exercised in dealing with state governments that may perceive a duty to protect their citizens and will surely do so in case of any (perceived) excesses. It may be worthwhile to remember that the Tamilnadu government even enacted an act for protecting the interests of depositors of money with NBFCs, based on mutual understanding with the RBI. It must therefore be expected that the state governments will assume, either directly or indirectly, a client protection role and this must be factored in while designing and delivering micro-pension product

·    Deep-rooted perceptions of social status, that place many categories of the rural and urban poor (Dalits, Tribals and especially women among them) at the bottom of the hierarchy, thereby limiting (effective) ways of reaching them – the aspect of social exclusion is very critical and must be recognized and addressed. Otherwise, just as in micro-finance, micro-pensions may not reach those in need of it the most, and

·    The lack of strong mechanisms of institutional learning, as a result of which there are no consistent means of incorporating lessons learned into new practice or policy – this is a very critical aspect and could be addressed by the existing associations or bodies like IIEF could take the lead in this…

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[i] Based on views of experts, discussion with MF industry observers and past papers like Asher et al 2007. I must specially state that Prof Asher and his wonderful papers have deeply influenced me with regard to Micro-Pensions and a lot of my ideas draw upon and/or elaborate on ideas from his different papers. These and other resources are gratefully acknowledged

[ii] Governance is an aspect that is lacking among financial intermediaries in India and can be regarded as the key factor that could result ultimately in failures. Governance assumes greater importance when MFIs become, even temporary custodians of peoples’ (clients’) money, like in micro-pensions

[iii]For example, the International Accounting Standards Committee defines related parties as “those able to control or exercise significant influence. Such relationships include: (1) parent-subsidiary relationships; (2) entities under common control; (3) associates; (4) individuals who, through ownership, have significant influence over the enterprise and close members of their families; and (5) key management personnel". The IASC expects that disclosures in this area should include. (a) the nature of relationships where control exists, even if there were no transactions between the related parties; and (b) the nature and amount of transactions with related parties, grouped as appropriate. (IASC International Accounting Standard No. 24, Related Party Disclosures).