Social Security and Pension A.Viswanathan June 18 th 2009.

Social Security and Pension

A. ViswanathanJune 18th 2009

1. Historic perspective2. Types of pension3. Risks and Rewards4. Indian pension system5. Civil service pension

6. Employees Pension Scheme 19957.New Pension System8. Micro Pension9. 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 1834.-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 exploitativeIn 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 personsIn 1925 a means tested pension for widows and orphans was passedLord 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 20th 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 sharedIt is redistributive in natureIt provides for intergenerational transferIt aims at poverty reduction

Risks and Rewards

Risks in DB PensionAgeingDependency RatioPolitical RiskEconomic Risk

Risks and Rewards

Reform of DB SchemesMany govts are battling to contain the crisisThere are no smart answersOne universal attempt is to increase the age of retirementThis is opposed by the publicTax increase is another optionThis has political implicationReduction of benefitsIt is a nightmare for pension administratorsWorld Bank promoted multipillar model

Risks and Rewards

It is a funded Scheme

It calls for individual running accountThe risks are passed on to the cohortsRisks areInvestment riskInterest rateMortalityPoliticalEconomicCost of admin and annuitization

Risks and Rewards

India has no universal pension schemeHowever many pension schemes existSpecific pension like Freedom fighter pension senior artistes pension are given by State and central government

Major public pension is NOAPSIt is administered by Central and State GovtsIt is means tested pensionNot considered to be efficient

Indian Pension System

Civil Service Pension

Central and State Govts have liberal and even generous civil service pensionIt is totally unfunded and tax financedRate of accrual was 1/66 per year of service now even further reduced to 1/40 It is indexed to inflation and future pay risesAged pensioners are given more reliefCommutation 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 SchemeRate of contribution is 8.33% diverted from employer's share of EPF ContGovt adds 1.16% to itThe benefits includeMember pensionSurvivor pensionChildren pension Orphan pensionDependent pensionwithdrawals

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 givenContribution is capped to Rs 6500 If a member contributes for 33 years he would get Rs 3250 As pensionPension 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 difficultiesA hybrid scheme like EPS 95 requires continuous calibrating of income investments and payoutsIt is difficult to manage changesReforms of removal of commutation etc have met stiff resistanceHigh level of withdrawals reward deserters at the cost of loyal members

Indian Pension System

Way forwardEPS 95 is an important old age income provisioning More than 4 million pensioners are benefittedBold initiatives are required to sustain and administer

Indian Pension System

It is applicable to all central Govt employees who joinedAfter 1st Jan 2004It is DC Scheme with10% rate of contribution for bothIt is IRA and investment options are available toCohortsIt was originally maintained by Accounts heads andgiven the administered rate of returnNow the investments are made by FMs and IRA is doneNSDL

New Pension System

NPS has no legal frameworkThe Bill is pending before the ParliamentIts initiative to open to general public is not a successIt has a very high admin cost which is charged Upfront Small investors would be at a disadvantageIt is a EET Scheme At the time of decumlation 40% compulsory annuitsation would be done It has a costIt 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 pensionNPS is also plagued by high costs and load on individual to make complex decisions and effortsThus 86% of workforce is out of social netIndia has a high saving traitsOut 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,etcTo 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 HOURIndia is a young countryHowever it has a large population and life expectancy at 60 years 15.7 for men and 17.1 for women Therefore we are also greyingIn 2030 we will have 130 million above 65yearsAnd working population of 950 million.In 2050 the aged in India will be more than entire EuropeTime is running out to provide some safety net for the aged Let us act now

Open house