India Finance Brief

"Inaction may be the biggest form of action - Jerry brown"

This article is a commentary of an opinion piece written by Mr. Mukul Asher of NUS, Singapore

The original piece can be found here - http://www.iief.com/Research/mukulasher1.pdf

As per Asher, the prime objective of any social security system is to provide a socially 'equitable' retirement to ones citizens on a sustainable basis. This approach should carefully avoid tradeoffs that come in the form of 'catering to needs' and 'curbing budgets'. Interestingly enough, India has an ever growing retiring work force and a widening deficit that makes it tough for it to provide sustainable pensions without compromising fiscal health

India's social security framework is divided into multiple components. Let us have a glimpse of them

1. EPFO - It's a body that manages retirement money of close to 3 Crore workers. It manages funds through professional fund managers with companies registering with them for PF contribution. Its ultra conservative in nature and nature of payout is partly DB and DC. It dons the role of service provider (for subscribers) and regulator (for exempted trusts). EPFO is widely considered a bureaucratic and inefficient institution grappling with infrastructure issues
2. Civil services schemes - These schemes cater to government staff (state/centre) who have a high pensioner count of close to 8 million whereas the current employee count is at 13 million. Such schemes are purely DB in nature and have high unfunded liability that is taken care of by budgets of respective governments
3. Exempted establishments - These include retirement funds of PSU/private companies that run their own funds professionally with supervision from EPFO. Fiduciary responsibility lies with the trustees. EPFO acts as an enabler and a super-regulator
4. Voluntary schemes - These include popular  schemes like PPF, Postal savings schemes and recently, NPS. These schemes are mostly DB except NPS, which is DC and market linked.

Reforms & reforms direction

Following are some points Mr.Asher observes as major characteristics of our social security systems and how their reforms should be directed at

1. Its highly welfare oriented & populist- Indias' SS systems are designed in a way to keep the public(read votebank) happy and content. Tradeoffs between payouts and fiscal planning have gone for a toss given the populist nature of decision making. Most payouts for government servants are generous with retirees getting as much as 50% of last drawn salary.
2. Lack of professionalism - Funds should be professionally managed with focus o benchmarking, mitigating dualism, fiscal sustainability, expand coverage, improve accessibility and using retirement funds to equity starved companies
3. Popularize NPS - phase out DB schemes and encourage public and private staff to embrace NPS. With the power of equity, subscribers would be in a position to leverage returns from a booming market and enhance overall portfolio yield.
4. Treatment of future liability - Steps should be ensured that payouts to civil servants retirees should be paid from a pre-determined sinking fund and not from contributions from new joinees, thereby avoiding a ponzi setup

Policy making should be based on consensus between retirement fund managers, EPFO, ministry and common public. While most schemes still have a populist bent of functioning, its imperative that fiscal stability & consolidation should come to the forefront during crucial decision making

Such reforms would focus on multiple goals of balancing fiscal stability and welfare orientation and converting retirement funds into vehicles of economic growth through active participation in nation building making it a globally recognized power house

About the author:

Salar Mohamed Bijili is an MBA graduate in Marketing from SIIB. Writes on economy, finance and Insurance. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it