Old against new
“We make a living by what we get, we make a life by what we have.” Attributed to Winston Churchill, that quote sums up the essence of the current retirement situation in India pertaining to the reforms carried out by the Pension Fund Regulatory and Development Authority. The Churchillian homily, however, is being shred to pieces by populists who oppose the New Pension System, which brings retirement savings closer to the market in keeping with global standards. Their divergent stance is inclined towards traditional pension, which held its supremacy before the nation consciously decided to relegate the old and adopt the new.
A recent wave of reforms has made the NPS the preferred route for many savers, especially younger individuals who can relate to its core value — Defined Contribution and not Defined Benefit, the latter forming the crux of the ancien régime. The former is believed to have empowered a large section of contemporary retirement aspirants, liberating them from what was clearly a drag on the system. In a nation where longevity risk is palpable and the fertility rate is declining, this is a critical step.
However, certain pockets of the pension landscape face reversal, courtesy those who still find merit in the DB option. These include the spectre of inadequate funding, which adds to the burden on public finances. The fact is that the new-fangled system has burgeoned. This is reflected in the increase in the size of its corpus which is in keeping with international trends. This clearly underscores the acceptance of DC in many parts of the world. Indeed, DC is expected to bolster long-term resources, to be used for infrastructure development.
The divergent view may be seen in light of several factors that dominate the retirement space. The central bank’s stance on interest rates is a key issue in this context. The Reserve Bank of India’s policy on rates has lately turned a lot less accommodative. This is a natural corollary of ascending inflation. The debt market, on which the pension systems depend, is in a flux. For the banking authorities, this poses a stiff challenge.
The reformed structure, complete with multiple investment choices, is set to appeal to younger subscribers. There are enough indications to suggest that voluntary contributions to NPS are on the rise. The discerning citizen, fed up with traditional,fixed-income investments, is looking at fresh allocations in market-oriented assets. The latter, driven by a number of fluctuating economic factors, do not offer fixed returns. Nevertheless, the long-term compounding impact of variable returns tends to outstrip the performance of narrow, assured-return alternatives.
As the DB versus DCdebate rages nationally, at least two state governments have tilted towards the old. Rajasthan has already gone back to the earlier format. The controversial proposal on reversion is not without its fiscal impact. The roll-back will have its social costs too; after all, the pension regulator has sought to involve the common man and offer him wider choices. Its outreach initiatives have touched the lives of marginalised groups too. In fact, such regional version will have a bearing on national integrity. The case for a single, pan-India pension regime will be damaged.
While some sections have felt that the two schemes are not comparable, it is agreed that the old avatar is constricted and unsuitable for market-driven preferences. Assured pensions are plagued by problems stemming from insufficient funding. India, if it were to emerge as an exception, must find its own solutions.
Populism, especially short-term expedience, is not an option for a pension-starved nation that has marked the 75th year of its independence. There are enough fiscal problems already. Old-age pension and social security will remain vital issues, particularly in light of the fact that the government has to direct vast resources to meet its pension obligations. The NPS eyes market-linked growth of savers’ hard-earned money. Yes, such a mechanism does not provide any assurance. But it gives millions of pension have-nots a chance to live with financial dignity.
Nilanjan Dey is a retirement planning educator