Pensions – Tool for social security Hemant Contractor Chairman, PFRDA

Social Security Social security refers to the economic security society offers when people are faced with certain risks. The ILO identifies the following contingencies usually covered by social security : health care Income security in cases of old age unemployment, sickness, work injury, maternity loss of a breadwinner

Features of Social Security Mandatory / Non Optional Government/ employer provided and provisions of entitlements and enforcements. Configured through Law Can be Taxpayer funded or Contribution funded or Employer funded (or combination of these)

Principal Social Security laws and Programs in India ORGANISED SECTOR: The Employees’ State Insurance Act, 1948 The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 The Employee’s Compensation Act, 1923 The Maternity Benefit Act, 1961 The Payment of Gratuity Act, 1972 Pension Fund Regulatory and Development Authority Act, 2013 UNORGANISED SECTOR: National Social Assistance Program NPS Swavalamban, Atal Pension Yojana

Social Security Schemes in India Fund Source Examples Eligibility Taxpayer Funded IGNOPS, AABY, IGNDPS, NFBS, RSBY Means tested/ BPL Employer (Legislation based) Maternity Benefit, Gratuity, Employee Compensation Organised sector Contributory (Employer + Employee) – under law EPF, EPS, EDLI ESIC Schemes Cess Based Beedi, cine, non-coal mine worker welfare schemes Specific segment Contributory PMJJSY, PMSBY, APY Voluntary States / Local bodies / Ministries Old age pension, disabled pension, Bunkar Bima Means tested/specific segments

INDIAN PENSION SYSTEM MULTI-PILLAR MODEL   PILLAR 0 PILLAR 1 PILLAR 2 PILLAR 3 Social security Grant Govt. Sector employees Occupational sector Private sector Name of schemes IGNAOPS , State Pension Schemes Defined Benefit scheme NPS Superannuation Trusts EPFO PPF Private pension schemes by MF and Insurance Co NPS /APY Coverage Means tested CG / CAB – Before 01.01.2004 SG/ SAB- before predetermined dates CG On or after 01.01.2004 SG/ SAB- after pre-determined dates Pvt. corporates As per the EPFO Act All Citizens above 18 years of age Participation Assured subject to means tested threshold Mandatory Voluntary Contribution Non Contributory Contributory – Employee and Govt to the extent of 10% of Basic +DA Contributory -12% for EPFO Contributory Benefits Guaranteed minimum income subject to maximum grant value Linked to last drawn salary Market based Administered rate APY – Min. guarantee by the govt. Funding Budget financed- Central and state Govts. Budget financed Contribution + Returns generated EPFO/ Govt NPS- PFRDA Management/ ownership / governance Public Govt/ PFRDA Trusts Others- Private Risk borne by Employee

No. of beneficiaries/ subscribers (in lakhs) Pillar Schemes covered No. of beneficiaries/ subscribers (in lakhs) Expenditure on pension/AUM (Rs. Crore) National Social Assistance Programme 262.36 5,322 1 Civil Service Pension under Old Defined Benefit Pension Scheme of Central Govt. 73.84 (51.96 pensioners + 21.88 serving) 96,771 2 -NPS (Mandatory Defined Contributory) -EPFO -Occupational Schemes– Coal miners, Seamen, Assam Tea Plant etc. 56.19   345.48   19.85 1,88,591   7,20,017   24,968.3 3 -NPS (Voluntary, Defined contribution) - APY -Superannuation funds, retirement funds/ plans, etc. by insurance companies and mutual funds 56.31   79.2 118.89     27,186   3,269 4,00,022 Total 1012.12 13,64,054 % of working age population , AUM/GDP 13.86 % 8.98%  Source: PFRDA, EPFO, Budget 2015-16, IRDAI, CMPFO, ATPPF, SPFO

Structural Demographic Transition in India, 1971 onwards Source: Govt. of India, WB Projections, UN projections, CRISIL-PFRDA, others.

Rising Numbers of the Elderly Age group 1961(%) 2011(%) 2026(%) 2050(%) < 60 94.4 91.4 87.6 80 >= 60 5.6 8.6 (110 mn) 12.4 (180 mn) 20 (297 mn)

Challenges in providing Social Security Prevalence of Huge Informal Sector Lack of universal social security systems Barriers to access financial services Low financial education

Challenges in providing pensions to informal sector Saving Preferences – Physical Assets – Gold, Real Estate, Land etc., Financial Assets – Banks fixed deposits- most preferred Financial Literacy and Awareness – Hard to convince the subscriber to opt for pension due to long term commitment Cost of reaching out – Budgetary constraints Persistence – dropout rates can increase unless followed up. People allocate their income to different goals based on urgency, immediacy and social pressure. Since old-age savings do not full fill these criteria, the uptake and demand for such products are limited.

Significant Activities - Pensions Strategic planning Design and funding Distribution and collection Administration Benefits Asset management Communication to members

Risks in DC Pension System Risk that the assets invested performs badly compared with the market Investment Risk Risk that the longevity assumed in annuities may be low Longevity Risk Risk of administrative errors, IT errors and failures, natural disasters, fraud, legal risks, outsourcing related risks and management or governance risks Operational Risk Risk that the vesting annuity is not inflation-adjusted, thus reducing its efficacy Inflation Risk

Risks in Pension in Payout phase Lumpsum reinvestment risk, Longevity risk. Programmed market risk involved Longevity risk Annuity Inflation risk A hybrid of these methods, or allowing the individual to move from one option to another. Such portability holds some merit as individuals can effectively increase their benefits by joining the best system at any given point.

How PFRDA addresses Pension Risks Adopted an unbundled architecture Different pension activities are carried out by different entities Investment Risks – Professional Fund Managers selected through rigorous selection and bidding process Longevity Risk – annuity component can range from 40% minimum to 100% of retirement corpus. Annuities issued by empanelled Insurance companies Inflation risk – subscribers are free to choose from annuities offered by Insurance companies Reinvestment risk – non annuity component can be withdrawn in a phased manner over 10 years

Thank You