Any defined benefit scheme puts an undue burden on the fisc if it has to expand coverage in a populous country. A defined contribution scheme like NPS is a better option to spread pension cover and provide an opportunity to earn higher returns.
Why India needs pension reforms?
Of the 500 million working population, only 7% are in the organised sector and are covered by some form of social security in the form of a defined benefit scheme for government pension for public sector employees recruited before 2004 and Employees Pension Scheme (EPS) for subscribers of Employees Provident Fund Organisation. The remaining 93% workers in unorganised sectors do not have any safety net to fall back after their retirement. Which is why India needs a pension reform that will help provide some sort of income in the old age to its workers.
When was the pension reform initiated?
The BJP-led NDA government initiated the reform by setting up a Pension Fund Regulatory and Development Authority (PFRDA) in 2003 and by launching a New Pension System in 2004, now rechristened as the National Pension System (NPS), for new recruits of central government employees. The Congress-led UPA government tried to carry forward the reform by introducing the PFRDA Bill in Parliament in 2005. The Bill has recently been passed by both Lok Sabha and Rajya Sabha. The legislation will give statutory status to PFRDA and enable it to regulate the sector better. It will also allow foreign fund managers to forge joint ventures with 26% stake and offer their expertise in managing long-term savings, foster competition and ensure higher returns to investors. The long-term investment by pension funds add depth to equity and bond markets, and helps stabilise the markets over a period by smoothening out short-term volatility. The economy will also gain as the long-term savings can be channelised to the productive sectors like infrastructure.
What is NPS?
NPS is a “pay-as-you-go” scheme that allows the working population to accumulate their savings until they turn 60. After attaining retirement, the NPS investor will get back 60% of the accumulated corpus and invest the remaining 40% in an annuity scheme that will generate monthly pension. The higher the accumulation and longer the savings, the returns will be better during old age. Since withdrawal is not allowed except in some cases, the chances that the pension corpus generating higher returns over a few decades are high. Investors get tax