Social Security and Pension

A. Viswanathan
June 18th 2009
1. Historic perspective
2. Types of pension
3. Risks and Rewards
4. Indian pension system
5. Civil service pension
6. Employees Pension Scheme 1995
7.New Pension System
8. Micro Pension
9. 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
 Pension – Historical Perspective
-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’
 Pension – Historical Perspective

In 1908 England passed law for payment of

pension to salaried persons
In 1925 a means tested pension for widows
and orphans was passed
Lord 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
 Types of Pensions

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
 Risks and Rewards

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
Risks in DB Pension
Ageing
Dependency Ratio
Political Risk
Economic Risk
 Risks and Rewards
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 of
retirement
This is opposed by the public
Tax increase is another option
This has political implication
Reduction of benefits
It is a nightmare for pension administrators
World Bank promoted multipillar model
 Risks and Rewards

It is a funded Scheme

It calls for individual running account

The risks are passed on to the cohorts
Risks are
Investment risk
Interest rate
Mortality
Political
Economic
Cost of admin and annuitization
 Indian Pension System

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

Civil Service Pension

Central and State Govts have liberal and even

generous 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 1/40
It is indexed to inflation and future pay rises
Aged pensioners are given more relief
Commutation 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 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
 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 given
Contribution is capped to Rs 6500
If a member contributes for 33 years
he would get Rs 3250
As pension
Pension 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 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
 Indian Pension System
Way forward
EPS 95 is an important old age income provisioning
More than 4 million pensioners are benefitted
Bold initiatives are required to sustain and
administer
 New Pension System

It is applicable to all central Govt employees who joined

After 1st Jan 2004
It is DC Scheme with10% rate of contribution for both
It 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

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 annuitsation
would be done It has a cost
It will be a long way to move from low hanging fruits to
universal scheme
 Micropension Initiative

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 and
efforts
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
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,etc
To advocate Govt’s co contribution as
sweeteners
To encourage retrial savings
Invest monies through UTI to give assurances of
probity and stability
THE NEED OF THE HOUR
India is a young country
However 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 aged
Let us act now
Open house