Adopting the NPS for the mass of unregulated workers in the informal sector requires the ability to set up systems that enable small amounts of cash to be remitted at irregular intervals over long periods of time. Much of the NPS framework has been set in place to provide this facility, but with just a few thousand direct entrants to the NPS so far in the six months or so that it has been open to them, the system has still to prove itself. There are however, precedents in the “micro-pension” model of Invest India Micro Pension Services (IIMPS) that provide useful lessons and that may eventually become incorporated themselves into the NPS framework.
IIMPS was set up by Invest India Economic Foundation, with support from UTI and the Self Employed Woman’s Association (SEWA), each of whom also own 10% of the equity. SEWA also owns a bank which itself has good IT and administrative functions, enabling IIMPS to work with groups of workers to collect multiple small contributions, pool them into significant amounts that can then be transferred to a fund management company such as UTI AMC. Not surprisingly, given this background, what has been common amongst many of the groups that have adopted the micro-pensions route is that they are women’s organisations.
U.K. Sinha, the Chairman and Managing Director of UTI Asset Management, gave some insights at the IIEF Pension Policy Conference on the lessons to be learnt from a number of micro-savings that are already in existence in India including UTI’s own one. These are all predicated on the fact that, as a recent IIMS Dataworks report suggested, 61mn of the 143mn lowest income earners (earning less than Rs. 3000 per month) are willing to save through a contributory social security arrangement. These workers have irregular income and the savings capacity is limited and hence the retirement payout is also limited. As a result, the cost for a service provider will be prohibitive. But social welfare is the responsibility of the State, and the Government needs to provide financial support for the retirement savings of these workers. The fiscal strain on the exchequer will be much higher if the Government looks to fund it at their retirement time.
Existing schemes that can provide precedents for the NPS include initiatives by State Governments such as those of Bihar, Karnataka and Rajasthan to provide savings for girls at birth that would be invested for them until they reach the age of 18. Other examples include Schemes set up by Andra Pradesh, Mahdya Pradesh and Rajasthan for workers, often women, to save small amounts with matching contributions from the State Governments up to a maximum of 1000 rupees a year. These schemes, even with maximum limitations provided by State Governments, are limited because the resources of the States themselves are limited. The NPS may well provide an alternative to them, but as Sinha argues, the Government may have to pay for recordkeeping and transfer charges for such moves to take place.
Bhardwaj’s own experience of implementing micro-pension schemes in states such as Rajasthan, is that it takes four months or to convince State politicians to approve a scheme. Not surprisingly, there is often concern over what the implications of a scheme would be at the political level and how satisfied voters will be with the outcome. Benefits need to be seen to be spread fairly throughout the geographic region, and targeted at specific groups deemed to require such help.
UTI itself has been a pioneer in the provision of micro-savings using the IIMPS micro-pension model. Their scheme is implemented through IIMPS and is designed to address the retirement savings needs of unorganized workers in rural, semi-urban and urban areas. The contributions, which could be from workers, state governments and/or non-governmental organisations are invested into the UTI Retirement Benefit Pension Fund, and contributions can be as low as Rs. 100 a month. Each worker gets a unique number and periodic statements on his account. The worker is then entitled to make systematic withdrawals from the age of 60.
Whilst there was initial concern that there would be a large drop-off of contribution after the initial enthusiasm, the experience so far has been that 98% of contributions have continued after the 3.5 years of existence of the fund. UTI’s route to provide micro-savings has been by finding a lead partner in each state. This could be a self help group, or some other organization which, through its normal activities, has a flow of payments to individuals, a small part of which could be diverted for pension provisions.
To succeed in persuading lowly paid workers to save for retirement requires education and also incentivisation. Robert Palacios a senior pension economist at the World Bank believes that it requires co-contributions by state or central governments to provide the necessary incentives and tax rebates. It also requires an outreach program argues Palacios, since the combined cost of an information program and getting to the end user is a huge burden. Channeling approaches through groups as UTI do, works well, but is limited in scope. Ultimately, individual households need to be approached in some way, similar to the Post Office offering life insurance.
Ultimately however, as Bhardwaj argues, the IIMPS micro-pension model of the type described cannot be a solution for India as a whole: “The problem is that even after saving for 30 years, the terminal amount is so small that it will not be able to provide a decent annuity for retirement for another 20 years. Moreover, as he points out, whilst workers are promised lump sums based on monthly payments that appear large in their eye, these figures are nominal amounts, which after 30 years of inflation, will turn out to be little in real terms.
The danger exists currently that many participants in the schemes may find that the promised terminal sums, whilst large from their standpoint, in today’s money, will not have kept up with inflation and be unable to produce an adequate retirement income. As Bhardwaj explains, what is required are two things: firstly there needs to be an education process to disseminate the idea that contributions to micro-pensions do need to be raised each year in line with inflation; and secondly, the government needs to supplement the amounts paid in with co-investments of its own. As Bhardwaj argues, there is a population of 61m who may save if co-investments are made on their behalf. The key part then is to reduce the transmission costs - something that the NPS architecture was expressly designed to do.