Why the Poor Need Pensions and What Strategies Do They Use for Old Age Security?

Ramesh S Arunachalam

Rural Finance Practitioner

As Table 1 suggests, there are several challenges that old people face and they have very few means for overcoming these challenges.

The case for micro-pensions can never be argued more strongly as these people suffer dual oppressions – being old and on top of that, being poor as well.

In terms of preparing for old age, the poor use several strategies including:

·         Investment in Assets (Cash or kind (Land/House), etc.)

·         Investment in Children – that is often why poor have many children, thus resulting in larger family sizes, which ironically prevents savings at a younger age

·         Save Cash (Different options)

·         Informal Groups and

·         Other temporary strategies including high cost borrowing

Therefore, there is an urgent need to enable the elderly to prepare for old age and the time for micro-pensions has never been stronger…

Cheers

Have a Nice Day

Ramesh

Security Needs of Low Income People: Potential Areas for Intervention…

Ramesh S Arunachalam

Rural Finance Practitioner

Typically, low-income peoples’ need for security can be broken into 5 different categories and these areas can be taken up for interventions. The various aspects are diagrammed in figure 1 below

“The International Labour Organisation’s notion of social security as expressed in the International Convention No.102 includes nine core contingencies that lead to stoppage or substantial reduction of earnings.  These are sickness, maternity, employment injury, unemployment, invalidity, old age, death, the need for long-term medical care and for supporting families with children.[i]” These are briefly highlighted in table below

1. Health Security: Health security can be described as ensuring low exposure to risk and providing access to healthcare services along with the ability to pay for medical care and medicine when necessary. Such health security should be equally available and accessible to all citizens and would need to be serviced by an inclusive delivery mechanism

(a) Minor and Major Incidence of Illness: The risk of health insecurity needs to be categorised on the basis of the kind of illness, - i.e. minor illness which can be treated with medication at home, and major illness necessitating hospitalisation. The latter can be termed as a ‘catastrophic’ risk[ii] as it has potential to cripple the family’s main/primary bread winner

(b) Risk of Untreated Morbidity among the Poor: A number of studies have shown that if the poor lack the resources to pay for healthcare, they often forego it completely or end up becoming indebted or impoverished while trying to pay for it[iii]. The aspect of indebtedness is rather severe and many families tend never to recover from this kind of borrowing…

(c) Cost of Treatment: “The cost of treatment includes medical fees, cost of medicines and diagnostic facilities, hospitalisation and the cost of travel, boarding and lodging[iv]. Corruption is an increasing cost in this as payments have to be made at various levels to facilitate good treatment (more of a perception sometimes). This issue tends to be rather severe and harsh, as always, for low income people and those under extreme (and severe) medical stress

(d) Burden of Treatment: “There is a difference between the ‘cost of treatment’ and ‘burden of treatment’ as pointed out by Krishnan (1999). The latter includes the cost of treatment (depending on the nature and duration of illness) plus ‘the loss of income of the patient and others during the period of illness’.  The burden of treatment for an individual or family is defined as the ratio of total cost of illness to the income of the individual or family[v].” While it is tempting not to include the livelihood loss, this may be particularly important for low income people, who may miss out on the fragile sources of income/livelihood to avail the treatment

2. Maternity Needs: This is indeed a critical aspect and especially true in countries like India – which “has a high maternal mortality rate, even judging by the standards of developing countries as a whole, not to speak of the Asian region.  The National Human Development Report prepared by the Planning Commission (GOI, 2002) states that, as of 1999, the maternal mortality rate (MMR) was 407 (indicating deaths per 100,000 deliveries  based on the Sample Registration System, SRS). The National Family Health Survey (NFHS), I and II, however, recorded a higher MMR and worse still, an increase in MMR from 424 in 1992-93 to 540 in 1998 (Priya, 2006)[vi].”

3. Life and Accident Security: The death of a breadwinner is a tragic event, but in the case of informal workers, it also raises the question of survival for the family left behind due to the permanent loss of income. Further, death entails additional expenses for which the family has to borrow money, often on onerous terms, spend savings or sell assets[vii].

4. Old Age Security: “The share of the aged (60+ years) in India is lower than the corresponding figure in its Asian neighbours in East and South-east Asia. However, as the demographic transition picks up in India, the share of the aged is likely to increase. Projections indicate that the current share of 7.47 per cent for the aged is likely to increase to 9.8 per cent by 2021. What is important from the social security point of view is the need for an institutional mechanism for taking care of the aged informal workers, in general, and the poor, in particular[viii].” The double burden of being poor and old indeed has a telling effect on such individuals and their families

5. Unemployment Insecurity: Another source of insecurity reported by the informal workers is unemployment. For the informal/unorganised workers, under-employment and low productivity employment with the consequent risk of low incomes and high levels of poverty constitutes a greater source of insecurity.

In India, the National Rural Employment Guarantee (NREG) Act is an attempt to provide employment security by guaranteeing at least 100 days of work in the several selected backward districts of the country. The Employment Guarantee holds the promise of significantly alleviating the problem of under-employment for those sections of the labouring population who can undertake manual labour. However, informal workers who are varied in terms of both the nature and location of work, would continue to face the risk of loss of employment for a variety of reasons. Hence further adaptation of the above to meet needs of a variety of informal workers to help them face certain types of contingencies needs to be considered[ix].”

Thus, as discussed above, the time has come to initiate a comprehensive and protective social security system that is inclusive of all low income people and workers in the informal economy – one that attempts to provide them comprehensive protection against all major risks simultaneously as if even one of them were left unattended, it may result in the individuals/their families being completely wiped out and/or suffering for years/generations. Thus, this would have to include social protection and risk mitigation strategies, apart from access to a variety of financial services including various types of insurance (health, life, accident, asset, livelihood etc), pensions and the like.

It is in this context that the micro-finance industry needs to explore various alternatives available…and come up with an attractive client oriented (social security) package that can have a lasting impact on the poor and their vulnerable families…without this, history will continue to repeat itself and we will be confronting with repeated crisis situations, again and again…

Cheers

Have a Nice Day!

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[i]  Compiled and quoted with adaptation from NCEUS Report (2006) “Social Security for Unorganised Workers”

[ii] “Catastrophic risks have been further categorised as those wherein the household health expenditures exceed either a certain fraction of the total household expenditures or their ability to pay (Garg and Karan, 2006). Household expenditure incurred on healthcare amounting to more than 5 per cent of the total non-food expenditure of the household is generally taken to be catastrophic.”

[iii] “On an average, the poorest quintile is 2.6 times more likely than the richest to forego medical treatment when ill (quoted in Devadasan, et. al., 2004). A study of slums in the two metropolitan cities of Chennai and Delhi found that 89 per cent of sick individuals residing in these slums did not obtain treatment when ill (Sunder, et. al., 2002). The relatively rich were more likely to obtain treatment. “

[iv] “According to the NSS, the cost of treatment includes direct payment to the hospital, and the cost of medicines, investigations and tests.  The NSS data records a steep rise in the cost of healthcare during the period 1985-86 to 1995-96. The cost of out-patient treatment rose by 132 per cent in the rural and by 146 per cent in the urban areas during this period. The cost of in-patient care rose by 436 per cent in the rural (Rs.3202 per episode in 1995-96) and by 320 per cent in the urban (Rs. 3921 per episode) areas during the given period (Iyer and Sen, 2000). The average expenditure for hospitalisation per hospitalised treatment, varied considerably across states and across rural and urban areas. In 1986-87, the lowest reported total expenditure for treatment in rural and urban sectors was in Kerala. The highest average total expenditure was Rs. 2053 and Rs. 1821 for rural and urban Delhi, respectively, as compared to a low of Rs. 464 and Rs.487 in rural and urban Kerala, respectively (Krishnan, 1999). There can be various reasons for the low cost of treatment in Kerala. However, the most important cause is the high density of government health facilities in rural areas and a high degree of competition between the public and private sector in healthcare in the state. Thus, the availability of public health infrastructure is crucial for bringing down the cost of treatment.”

[v] “Using NSS 1986-87 data, Krishnan (1999) estimated the relative burden of treatment, including only direct costs, as the ratio of treatment cost to the annual per capita expenditure of each monthly per capita expenditure decile group, to assess the extent of the financial burden faced by different socio-economic groups. The burden of treatment in government hospitals in the rural sector is below 30 per cent in Kerala, Tamil Nadu and West Bengal, while it varies from 100 to 230 per cent in Bihar, Assam, Punjab, Rajasthan, Haryana and Uttar Pradesh. The burden of treatment in private hospitals in the rural areas exceeds 100 per cent in all states except Assam, West Bengal, Kerala and Tamil Nadu.  This implies that many households in these states financed healthcare by incurring debt or foregoing their overall consumption.  Such a reduction in consumption, often of the food intake, could increase the risk of infection and morbidity in the society. Women and children are likely to face higher risks in this regard.”

[vi] “The national average, however, conceals the considerable regional variation within India with Kerala registering a maternal mortality rate of 198 only and Uttar Pradesh a rate as high as 707. Even after half a century of independence, one of the most frequent causes of death among women in India is maternal mortality. Abortion, haemorrhage, toxaemia and anaemia account for the large majority of all maternal deaths. These causes of mortality suggest that a large number of maternal deaths are preventable. While nutrition and adequate spacing between births are important, the crucial factor that often comes into play is the lack of professional help during delivery.  If institutional delivery is taken as an indicator, then Kerala shows, as of 1999, almost complete coverage (with 94 per cent of the births in the State taking place in healthcare institutions) as against 42 per cent for the country as a whole, and less than 30 per cent for many States including the large ones such as Uttar Pradesh, Bihar and Madhya Pradesh. Thus the urgent need for adequate health infrastructure in the country cannot be over-emphasised.   However, a security cover such as an insurance scheme offering maternity benefits is also likely to increase the chances of institutional delivery, leading to a consequent decline in maternal deaths.”

[vii] An accident, either during the course of work or otherwise, is a major crisis for informal workers since it leads to loss of income. It further implies additional expenditure of medicines, hospitalisation, etc. If the accident leads to partial and/or permanent disability, the financial loss is much greater. 

[viii] The study by Rajasekhar, et. al. (2005) mentioned earlier, revealed that old age was a major concern for the workers.  According to the study, agricultural labourers and construction workers reported the fear of not being able to work during old age. Insecurity with regard to old age was perhaps due to the breaking up of the joint family system and also because the poor were more likely to be living in nuclear families. With the proportion of aged persons expected to increase significantly in the future, their work-related insecurities are also expected to increase due to various reasons. Firstly, adults in poor households themselves face insecurity of work and income in their quest to lead lives of security and some dignity. Successive Population Censuses have shown a declining work participation rate (WPR) among the elderly. This may be a positive feature, implying that they are able to retire early. For the informal workers, however, this could be a source of risk, since their earnings during their working lives are unlikely to support their needs in the old age. Secondly, in India, the aged are generally dependent on their children for support. The presence of the aged in poor families adds to the financial burden and further deprivation of the family as a whole. The insecurity of the household is further exacerbated by general poverty and greater morbidity among the aged. Thirdly, the absence of adequate public healthcare facilities, and the increasing cost of private healthcare facilities for the aged can throw the household into a major crisis (Alam, 2006).”

[ix] “A large number of voluntary and people’s organisations are involved in providing a measure of protective social security to workers and their families in the unorganised sector in the country.  However, such provision is often part of a larger package of services that include promotional social security such as access to micro-credit, housing, preventive healthcare and employment.  For the purposes of this report, we have selected organisations in the voluntary sector, which provide protective social security in one way or another. The total number of individuals covered by various social security schemes undertaken by NGOs is around 33.51 lakh.  In addition, about 1.06 lakh households have been covered as beneficiary units under various schemes. Further, community schemes cover around 40 villages.  If all these are converted into individual coverage, it would amount to around 48 to 50 lakhs.  This accounts for about 1.5 per cent of the estimated workforce in the unorganised sector.  Even if we assume that a number of small organisations might have been left out of the data set, it is quite unlikely for the entire voluntary sector coverage to be more than two to three per cent of the total workforce in the unorganised sector. The geographical coverage of organisations shows that they are concentrated in the three southern states {Andhra Pradesh (16), Karnataka (8) and Tamil Nadu (12)},   the two western states of Gujarat (5) and Maharashtra (10), and one eastern state, i.e. West Bengal (5).  As described in the previous chapter, Kerala (5) has a well-developed state-initiated and supervised protective social security system in the form of Welfare Funds/Boards, which explains the small presence of the voluntary sector in the State. However, the absence of the voluntary sector in most other states, especially in the large states of Uttar Pradesh (3), Bihar (1), Chattisgarh (1), Madhya Pradesh (1), and Orissa (3), is accompanied by the low presence or complete absence of any state-initiated social security system.  This should indeed be viewed as a matter of concern.”

Alternative Channels and Product Suggestions for Micro-Pensions…

Ramesh S Arunachalam

Rural Finance Practitioner

A range of options exist for alternative distribution channels but the major ones are producer organisations, governments, state livelihood missions, agriculture and other corporates, banks, insurance intermediaries, telecom companies, retailers and others – they are keen to enter the market and need to be capacitated and incentivised to extend (and distribute) coverage of client responsive pension services to low income people in a sustainable and scalable manner.

Among these, a major channel through which micro-pensions could be distributed[1] are the post offices. They have established presence in interior areas and this outreach could be used to service low income clients with regard to micro-pensions. As government machinery and for other good reasons, post offices enjoy a high degree of credibility. While their personnel are experienced in handling small savings, they may need to be trained to service pension schemes. Moreover, the post office may need to offer more flexibility in terms of deposit timings and even perhaps doorstep collection services to ensure regularity of savings. An experienced asset management company should handle funds management, for and on behalf of post offices

In terms of product substitutes, reverse mortgage arrangements are another product and channel that can be considered.

Thus, it appears that a variety of channels, as given above, must be used to expand the coverage of micro-pensions and this alone can help achieve the goal of including large numbers of elderly poor people in the future, in India’s financial system.

Ideas for suggested pension equivalent (substitute) products, based on discussions in India with various stakeholders and low income clients are given below:

 

Cheers

Have a Nice Day!

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[1] Several industry experts including Asher et al (2007) concur with this view but suggest that some capacitation will be required.

The UTI Micro-Pension Scheme in India: An Example of A Formal Micro-Pension Scheme…

Ramesh S Arunachalam

Rural Finance Practitioner

‘The first micro-pension scheme with UTI AMC as the fund manager was launched nearly in 2005. UTI AMC has since forged partnerships with several intermediaries/third parties: SEWA (Self Employed Women’s Association), a micro finance institution based in Ahmedabad; COMPFED, a federation formed by milk producers in Bihar; Paradip Port Trust; and an urban cooperative bank run by women’.[1] Other partnerships of UTI include SHEPHERD in Trichy, which the then Hon Finance Minister inaugurated

‘The key characteristics of the UTI AMC micro-pension scheme, whose process is given in Figure 1, are:

a)      ‘Contribution of small sum ranging from Rs.50 to Rs.200 per month;

b)     Flexibility in payments (monthly or yearly contributions are not mandatory), and

c)      Presence of a neutral third party, like an MFI, NGO, Cooperative, Self help groups (SHG) or an NGO, whose typical roles are described in box 1’[2]

Box 1: The Role of Third Parties in UTI Micro-Pensions

The third party like an MFI or NGO performs several roles. First, they are aggregators for generating a large number of pension fund members with common characteristics; Second, they undertake several administrative roles; and Third, they act as conduits for free flow of communication, between pension fund and members. Third parties typically help in reducing transactions costs by identifying (captive market) members, collecting contributions, and record-keeping. It imperative therefore that the third party enjoy the strong trust and confidence of members as well as be competent in administration and financial matters - both of these need to be maintained or enhanced over the long term. Increasing supply of effective and efficient third parties is therefore critical to expanding the reach of micro-pensions[3] ’

Currently, while the UTI AMC micro-pension scheme has been operational for some time, feedback is being sought by the intermediaries and hopefully, it will feedback into product and process design.

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[1] Quoted with adaptation from Asher (2007)

[2] Quoted with adaptation from Asher (2007)

[3] Asher (2007) and several others including media have dwelt on these roles of third parties/MFIs/NGOs etc

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.

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

 

Developing Micro-Pensions: Key Features of A Potential System and Lessons For Building Effective and Efficient Micro-Pensions

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

Cheers

Have a Nice Day

Old Age Security Scheme (OASS) of SIFFS – An Informal Micro-Pension Scheme in India

Ramesh S Arunachalam

Rural Finance Practitioner

There is an informal scheme, in the fisheries sector, which SIFFS has been running as a long term savings scheme called as OASS – Old Age Security Scheme. As per the scheme, a sea going fisherman can get a pension from age of 60 but he is required to save Rs 50 per month until then.

SIFFS was managing the OASS but was looking for a professional fund manager to help manage these in the long term. The scheme was started in 2001 as a part of the SIFFS microfinance program. The voluntary saving scheme has completed 10 years in 2011 and it has been promoted very much in Tamil Nadu and Kerala region.

The flow of money in the SIFFS OASS is given in figure 1 below:

This saving scheme is intended to help the artisanal fishermen to accumulate a lump sum at the time of retirement from fishing. The salient aspects are:

·       OASS is designed for the fishermen community as a long term pension scheme

·       Any person with membership in SIFFS society can join in the scheme but he has to be an active sea going fisherman

·       Minimum eligible age to join is 18 years and up to retirement age of 60

·       Multiples of Rs.50 can be remitted as premium amount (e.g., 100,150,200)

·       Penalty for defaulters exists and it varies by type of default/delinquency

·       Interest is generally linked to the post office interest rate on savings

·       Option for withdrawal of deposit on death, membership closure but based on certain conditions.

The deposit growth chart is given in table below

Several aspects appear to have helped SIFFS be successful in its OASS scheme:

·       Long term trust of fisherman in societies

·       Long term trust of fishermen in their federations/SIFFS

·       Several other aspects including social acceptability of SIFFS and its member societies/federations, availability of local information, a dedicated team of staff and other factors like a convenient product, which is priced well and distributed appropriately backed by good governance, transparent systems and prudent management.

Cheers

Have a Nice Day

Differences between Micro and Traditional Pension Products and Implications for Distribution of Micro-Pensions…

Ramesh S Arunachalam

Rural Finance Practitioner

There are many key differences between traditional and micro-pension products, which have significant implications for distribution of micro-pensions, operational strategies used to deliver them and associated costs. Several aspects deserve mention here:

First is the aspect of the proximity of pension fund (manager) to customers, which is closer in case of traditional pension products (TPPs) than micro-pension (MP) products, whose clients tend to be far removed and less accessible.

Second, is the issue of awareness of the customers and their preparedness to fulfill their (contractual) obligations (in terms of prompt payments of their contributions etc), again higher in case of TPP customers and lower for BoP clients.

Third is the issue of total value and unit transaction value, both of which are higher for traditional as opposed to micro-pension products.

Fourth, is the aspect of number of transactions, which is inordinately high for BoP clients as opposed to TPP customers. This can really have an impact on processing costs and time

Fifth, is the aspect of higher transactions cost, arising out of the above, again much lower in case of traditional as opposed to micro-pension products.

The key differences are summarized in Table 1 below.

Thus, micro-pension products have special characteristics, which makes distribution naturally difficult.

Specifically, a high level of post sales service is required year after year, which means higher costs of servicing clients. Therefore fee (or commission) structures should afford sufficient incentives to absorb the inordinately high costs (because of remoteness and lack of easy access to customers).

That said, a key question that remains is how to enable various stakeholders to address this and enhance distribution effectiveness, while at the same time being efficient…from a cost and client stand point…

Cheers

Have a Nice Day

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).