Viswanathan June18 Pensions

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Social Security and Pension

A. Viswanathan

June 18th 2009


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1. Historic perspective

2. Types of pension

3. Risks and Rewards

4. Indian pension system

5. Civil service pension


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6. Employees Pension Scheme 1995

7.New Pension System

8. Micro Pension

9. Open House


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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 ofLast salary


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-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 exploitative

In 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



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In 1908 England passed law for payment of

pension to salaried persons

In 1925 a means tested pension for widowsand orphans was passed

Lord Beviridge in 1941 introduced the

principle of social security as Cradle to

GraveAcross Europe encouraged by Bismarck

universal pension was introduced by various

countries during early 20th century



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CLASSIFICATION OF PENSION

Defined Benefit (DB)

Defined (DC)

Types of Pensions


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Defined Benefit (DB) can be defined

as a guarantee by the

insurer/sponsor that the benefitbased on prescribed formula will be

paid

Types of Pensions


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Defined Contribution (DC) is plan in which

periodic contribution is prescribed and thebenefit depends upon the contribution

plan period and the investment return

Types of Pensions


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DB Scheme is based on Solidarity

principle in which the resources are

pooled and risks are shared

It is redistributive in nature

It provides for intergenerational transfer

It aims at poverty reduction

Risks and Rewards


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Reform of DB Schemes

Many govts are battling to contain the crisis

There are no smart answers

One universal attempt is to increase the age ofretirement

This is opposed by the public

Tax increase is another option

This has political implicationReduction of benefits

It is a nightmare for pension administrators

World Bank promoted multipillar model

Risks and Rewards


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It is a funded Scheme

It calls for individual running account

The risks are passed on to the cohorts

Risks are

Investment risk

Interest rateMortality

Political

Economic

Cost of admin and annuitization

Risks and Rewards


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India has no universal pension scheme

However many pension schemes exist

Specific pension like Freedom fighter pension senior

artistes pension are given by State and central

government

Major public pension is NOAPS

It is administered by Central and State Govts

It is means tested pension

Not considered to be efficient

Indian Pension System


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Civil Service Pension

Central and State Govts have liberal and evengenerous civil service pension

It is totally unfunded and tax financed

Rate of accrual was 1/66 per year of service

now even further reduced to 1/40It is indexed to inflation and future pay rises

Aged pensioners are given more relief

Commutation is also liberal and a moral hazard



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Employees pension Scheme 1995

It is a strange animal as it is both DC and DB Scheme

Rate of contribution is 8.33% diverted from employer's

share of EPF Cont

Govt adds 1.16% to it

The benefits include

Member pension

Survivor pension

Children pension

Orphan pension

Dependent pension

withdrawals



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Pension is calculated with accrualrate of 1/70 however if 20 years of

service id done a bonus of 2 year

accrual is given

Contribution is capped to Rs 6500If a member contributes for 33 years

he would get Rs 3250

As pension

Pension is payable after 10 years ofcontribution if the age is 50 Early

exits are subject to reduction in

pension up to 25%

Pension is not indexed and is fixed.



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EPS 95 is liberal Scheme and therefore is already

showing

signs of difficulties

A hybrid scheme like EPS 95 requires continuous

calibrating

of income investments and payouts

It is difficult to manage changes

Reforms of removal of commutation etc have met stiff

resistance

High level of withdrawals reward deserters at the cost

of loyal members



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Way forward

EPS 95 is an important old age income provisioning

More than 4 million pensioners are benefitted

Bold initiatives are required to sustain andadminister



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It is applicable to all central Govt employees who joined

After 1st Jan 2004

It is DC Scheme with10% rate of contribution for bothIt is IRA and investment options are available to

Cohorts

It was originally maintained by Accounts heads and

given the administered rate of return

Now the investments are made by FMs and IRA is done

NSDL

New Pension System


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NPS has no legal framework

The Bill is pending before the Parliament

Its initiative to open to general public is not a success

It has a very high admin cost which is charged

Upfront

Small investors would be at a disadvantage

It is a EET Scheme

At the time of decumlation 40% compulsory annuitsationwould be done It has a cost

It will be a long way to move from low hanging fruits to

universal scheme

New Pension System


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Civil service pension and EPS are not designed

to be a universal pension

NPS is also plagued by high costs and load on

individual to make complex decisions andefforts

Thus 86% of workforce is out of social net

India has a high saving traits

Out of 143 million workers who earn less than

Rs3000 a month 61 million are keen on saving

about 10%

Micropension Initiative


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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 Govts co contribution as sweeteners

To encourage retrial savings

Invest monies through UTI to give assurances of

probity and stability

Micropension Initiative


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THE NEED OFTHE 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 greying

In 2030 we will have 130 million above 65years

And working population of 950 million.

In 2050 the aged in India will be more than entire

Europe

Time is running out to provide some safety net

for the agedLet us act now


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Open house

Viswanathan June18 Pensions

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