Earlier this month, and after a wait for nearly 10 years, the Pension Fund Regulatory and Development Authority (PFRDA) bill was finally passed by the two Houses of Parliament, conferring a statutory status to the authority. The New Pension Scheme (NPS), which reflects the government’s effort to find sustainable solutions to the problem of providing adequate post-retirement income, has thus acquired an official regulator.
With the introduction of the NPS the government of India has taken a first step towards instituting pension reforms, moving from a defined benefit pension to a defined contribution-based pension system by making it mandatory for all new recruits (except armed forces) joining service on and after January 1, 2004. The erstwhile defined benefit system that promised a percentage of final salary in post-retirement years has been jettisoned and replaced by a system that cannot offer a similar assurance. Government employees now face an uncertain future where returns on NPS investments will hinge entirely on the vagaries of the market. At the same time they have to face the onslaughts of price inflation that refuses to be tamed.
For long years, the rules governing public service differed greatly from those in the private sector. What set the civil servants apart from others was the nature of their duties: they exercised public authority, with the sacrifices and demands on loyalty which this entailed. In return, the state assumed responsibility for supporting them till the end of their lives. This viewpoint was also confirmed by the judgment of the Supreme Court (Nakara vs the Union of India, 1982) which had ruled that pension is not only compensation for loyal service rendered in the past but also a measure of socio-economic justice that includes social security in old age. Now that the government has lifted its protective arm by introducing a defined contribution pension system, civil services will lose much of their sheen. With life expectancy going up, the post-retirement income for employees has assumed as much criticality for survival as career wages.
Indian Railways employs nearly 1.3 million workers who are engaged in a multitude of activities across the length and breadth of India. More than 97 per cent of them belong to Group C and D categories. They are the relatively lower salaried workers, a good proportion of who are engaged in manual duties in the field, such as the gang men looking after the tracks, artisans in workshops, gatemen manning the level crossings, sanitation staff at the stations, shunting staff in the yards, and many more attending to the upkeep and maintenance of a variety of electrical, mechanical and signaling equipment.
Does the railway administration reasonably expect this large contingent of Group C and D employees to have acquired a fair level of financial literacy that could guide them to the most rational mix of investment in the NPS? Has any effort been made to set up a designated group to raise awareness of pensions among them and improve their level of financial education? There is a real risk that individuals may opt for only that portfolio of assets which has the least volatility, and thus obtain poor consumption in old age. The NPS guidelines also stipulate that in case a subscriber fails to exercise any of the prescribed choices as regards assets allocation, his contributions will be invested in accordance with the ‘Auto Choice’ option that authorises the government to place funds in a pre-defined mix of portfolio. It is equally difficult for unsophisticated participants to make a choice of a funds manager. They might also find themselves at sea when at superannuation they have to select an annuity scheme for annuitising the mandated 40 per cent of the final accumulation. Administrative overheads and multiplicity of fixed charges (registration, contribution upload, account maintenance, transaction costs, etc.) will also adversely affect the amount of pension.
These are serious issues that the railway authorities administering the scheme should try to resolve. Lack of knowledge of the NPS structure and specific data on their own entitlements may result in employees carrying unrealistic expectations of their post-retirement incomes, and may consider themselves short changed when the final amount gets known on retirement. Even today there is a good cause to worry as the NPS funds for government employees have posted losses of 2.45 per cent in the past one year. The SIP (Systematic Investment Plan) returns — calculated on the basis of monthly investments — earned by UTI Retirement Solutions, SBI Pension Fund and LIC Pension Fund — the three nominated Pension Fund Managers (PFMS) — over the last three to five years are reported to have averaged a mere 5.88%, 5.84% and 6.58% respectively, far below the 8.6% offered by the Employees’ Provident Fund (EPF).
A very significant amendment to the PFRDA Bill has been the additional option given to the subscribers for investing in schemes with minimum assured returns. This should be welcome news for those not able to decide on other prescribed options. What this guaranteed rate of return is going to be is yet to be notified by PFRDA, but one can safely assume that this will entail an additional charge by the PFMs for providing the guarantee.
Indian Railways should be able to have its say in the matter and act differently if needed. It should stand behind its men and demand that the guaranteed minimum rate of return should not be less than that applicable for EPF, in the minimum for the staff in lower salary brackets that stand disadvantaged because of lack of familiarity with the functioning of capital markets. This will also be in line with the suggestion made by the Yashwant Sinha-led Standing Committee on Finance. Alternatively, the railways should agree to meet the shortfall between the notified EPF rate and the actual returns earned on the minimum guarantee schemes from its own resources. A sinking fund could be set up for the purpose, taking cognisance of the fact that the outgo from this fund will begin only after more than three decades from now, and the annual contributions needed to be made to the fund are not going to make any serious dent in the ministry’s budget. Such a move will motivate its men to perform better, leading to higher traffic in the long run.
The author is a former MD of Railway Finance Corporation.
E-mail: mathur.surendra@gmail.com