Sixteen years after the first serious move, India’s modern pension system finally got going on May 1. However, I suspect that the struggle to create an effective, widely-used retirement benefit system has just begun.
This is a ‘defined contribution’ plan, as opposed to the ‘defined benefit’ nature of the older system for government pensions. In the old system, the government (and other pension-payers) defined what pensioners would get. In the new system, only what is put in is defined, what comes out depends on how well the pension fund is managed.
Back in the 1990s, the initial motive was to reduce the government’s future pension liabilities, at least as far as I can recall. The New Pension System (NPS) was talked about mostly as a better way to pay pension to government employees.
But, over the years, it has emerged as a retirement savings solution for those in the unorganised sector and for the self-employed. The NPS is an excellent vehicle to do this. One pick holes in it, and no doubt its flaws will get fixed as time goes by. On the whole, the NPS is a huge opportunity to create a financial safety net for crores of Indians who don’t have it.
But who is going to send the message to those who have long relied on cash under the pillow or some gold for safety? If you want a vegetable vendor or an autorikshaw driver to start creating a ‘retirement solution’ for himself, somebody has to talk him into it. Given the low cost structure of the NPS, there is no room for that someone to exist.
I fear bad-mouthing of the NPS by its competitors. On Day One, a newspaper reporter who tried to open an account at a designated bank found that salesmen there tried to divert him to some expensive pension plan peddled by that bank’s co-owned insurance company!
We need persistent and effective publicity to boost the NPS. The Pension Fund Regulatory and Development Authority’s (PFRDA) promotional role is just starting. Please note the D in the abbreviation. Without it, NPS is not going to fulfill its revolutionary potential.