Social Security and Pension A.Viswanathan June 18 th 2009

1.Historic perspective 2.Types of pension 3.Risks and Rewards 4.Indian pension system 5.Civil service pension

6. Employees Pension Scheme New Pension System 8. Micro Pension 9. Open House

Pension – Historical Perspective -Is a series payments made sequentially for a defined period of time -First ever pension was for British civil servants by Superannuation Act The Rate of Accrual was 1/60 and after 45 years of service the pension would be 2/3 last salary -Later the Rate of Accrual was reduced to1/80 and 40 years of service is required to get ½ of Last salary

-For general population England had a “Poor Law” -It was to mitigate the hardship of poor who did not have any means of old age income -The law was much abused and exploitative In 1879 Cannon Blackley suggested a contributory DC and DB Scheme for payment of pension to general population. -This was' not accepted’ -In 1889 Bismarck introduced a DB Pension Scheme for ‘salaried persons’ Pension – Historical Perspective

In 1908 England passed law for payment of pension to salaried persons In 1925 a means tested pension for widows and orphans was passed Lord Beviridge in 1941 introduced the principle of social security as “Cradle to Grave” Across Europe encouraged by Bismarck universal pension was introduced by various countries during early 20 th century Pension – Historical Perspective

CLASSIFICATION OF PENSION Defined Benefit (DB) Defined (DC) Types of Pensions

Defined Benefit (DB) can be defined as a guarantee by the insurer/sponsor that the benefit based on prescribed formula will be paid Types of Pensions

Defined Contribution (DC) is plan in which periodic contribution is prescribed and the benefit depends upon the contribution plan period and the investment return Types of Pensions

DB Scheme is based on “Solidarity” principle in which the resources are pooled and risks are shared It is redistributive in nature It provides for intergenerational transfer It aims at poverty reduction Risks and Rewards

Risks in DB Pension Ageing Dependency Ratio Political Risk Economic Risk Risks and Rewards

Reform of DB Schemes Many govts are battling to contain the crisis There are no smart answers One universal attempt is to increase the age of retirement This is opposed by the public Tax increase is another option This has political implication Reduction of benefits It is a nightmare for pension administrators World Bank promoted multipillar model Risks and Rewards

It is a funded Scheme It calls for individual running account The risks are passed on to the cohorts Risks are Investment risk Interest rate Mortality Political Economic Cost of admin and annuitization Risks and Rewards

India has no universal pension scheme However many pension schemes exist Specific pension like Freedom fighter pension senior artistes pension are given by State and central government Major public pension is NOAPS It is administered by Central and State Govts It is means tested pension Not considered to be efficient Indian Pension System

Civil Service Pension Central and State Govts have liberal and even generous civil service pension It is totally unfunded and tax financed Rate of accrual was 1/66 per year of service now even further reduced to 1/40 It is indexed to inflation and future pay rises Aged pensioners are given more relief Commutation is also liberal and a moral hazard Indian Pension System

Employees pension Scheme 1995 It is a strange animal as it is both DC and DB Scheme Rate of contribution is 8.33% diverted from employer's share of EPF Cont Govt adds 1.16% to it The benefits include Member pension Survivor pension Children pension Orphan pension Dependent pension withdrawals Indian Pension System

Pension is calculated with accrual rate of 1/70 however if 20 years of service id done a bonus of 2 year accrual is given Contribution is capped to Rs 6500 If a member contributes for 33 years he would get Rs 3250 As pension Pension is payable after 10 years of contribution if the age is 50 Early exits are subject to reduction in pension up to 25% Pension is not indexed and is fixed. Indian Pension System

EPS 95 is liberal Scheme and therefore is already showing signs of difficulties A hybrid scheme like EPS 95 requires continuous calibrating of income investments and payouts It is difficult to manage changes Reforms of removal of commutation etc have met stiff resistance High level of withdrawals reward deserters at the cost of loyal members Indian Pension System

Way forward EPS 95 is an important old age income provisioning More than 4 million pensioners are benefitted Bold initiatives are required to sustain and administer Indian Pension System

It is applicable to all central Govt employees who joined After 1 st Jan 2004 It is DC Scheme with10% rate of contribution for both It is IRA and investment options are available to Cohorts It was originally maintained by Accounts heads and given the administered rate of return Now the investments are made by FMs and IRA is done NSDL New Pension System

NPS has no legal framework The Bill is pending before the Parliament Its initiative to open to general public is not a success It has a very high admin cost which is charged Upfront Small investors would be at a disadvantage It is a EET Scheme At the time of decumlation 40% compulsory annuitsation would be done It has a cost It will be a long way to move from low hanging fruits to universal scheme New Pension System

Civil service pension and EPS are not designed to be a universal pension NPS is also plagued by high costs and load on individual to make complex decisions and efforts Thus 86% of workforce is out of social net India has a high saving traits Out of 143 million workers who earn less than Rs3000 a month 61 million are keen on saving about 10% Micropension Initiative

IIMPS is striving to address the coverage gap and to; To provide a transparent scalable and low cost solutions, To target groups like coops, unions, SHGs,etc To advocate Govt’s co contribution as sweeteners To encourage retrial savings Invest monies through UTI to give assurances of probity and stability Micropension Initiative

THE NEED OF THE HOUR India is a young country However it has a large population and life expectancy at 60 years 15.7 for men and 17.1 for women Therefore we are also greying In 2030 we will have 130 million above 65years And working population of 950 million. In 2050 the aged in India will be more than entire Europe Time is running out to provide some safety net for the aged Let us act now

Open house