viswanathan june18 pensions
TRANSCRIPT
-
8/6/2019 Viswanathan June18 Pensions
1/25
Social Security and Pension
A. Viswanathan
June 18th 2009
-
8/6/2019 Viswanathan June18 Pensions
2/25
1. Historic perspective
2. Types of pension
3. Risks and Rewards
4. Indian pension system
5. Civil service pension
-
8/6/2019 Viswanathan June18 Pensions
3/25
6. Employees Pension Scheme 1995
7.New Pension System
8. Micro Pension
9. Open House
-
8/6/2019 Viswanathan June18 Pensions
4/25
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
-
8/6/2019 Viswanathan June18 Pensions
5/25
-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
-
8/6/2019 Viswanathan June18 Pensions
6/25
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
Pension Historical Perspective
-
8/6/2019 Viswanathan June18 Pensions
7/25
CLASSIFICATION OF PENSION
Defined Benefit (DB)
Defined (DC)
Types of Pensions
-
8/6/2019 Viswanathan June18 Pensions
8/25
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
-
8/6/2019 Viswanathan June18 Pensions
9/25
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
-
8/6/2019 Viswanathan June18 Pensions
10/25
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
-
8/6/2019 Viswanathan June18 Pensions
11/25
-
8/6/2019 Viswanathan June18 Pensions
12/25
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
-
8/6/2019 Viswanathan June18 Pensions
13/25
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
-
8/6/2019 Viswanathan June18 Pensions
14/25
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
-
8/6/2019 Viswanathan June18 Pensions
15/25
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
Indian Pension System
-
8/6/2019 Viswanathan June18 Pensions
16/25
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
-
8/6/2019 Viswanathan June18 Pensions
17/25
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.
Indian Pension System
-
8/6/2019 Viswanathan June18 Pensions
18/25
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
-
8/6/2019 Viswanathan June18 Pensions
19/25
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
Indian Pension System
-
8/6/2019 Viswanathan June18 Pensions
20/25
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
-
8/6/2019 Viswanathan June18 Pensions
21/25
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
-
8/6/2019 Viswanathan June18 Pensions
22/25
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
-
8/6/2019 Viswanathan June18 Pensions
23/25
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
-
8/6/2019 Viswanathan June18 Pensions
24/25
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
-
8/6/2019 Viswanathan June18 Pensions
25/25
Open house