Column: Can we build a mass market for NPS?

The 2010-11 Union Budget has proposed an annual co-contribution of Rs 1,000 for people who voluntarily open a new pension scheme (NPS) account in the coming financial year. This benefit is aimed at low-income workers who can only save between Rs 1,000-12,000 per year. Apart from the social attractions of this approach, there is an important vertical tax equity issue involved. High-income earners enjoy benefits of up to Rs 30,000 tax deduction per year for retirement contributions. Low-income workers are excluded from such tax benefits. From a tax expenditure point of view, there is little difference between tax-funded subsidies and forgone tax revenues.

On the face of it, therefore, the Swavalambam initiative announced by the FM seems to be a prudent policy measure, especially since the low, intermittent incomes of most informal sector workers may not produce an above-poverty annuity, even if they diverted a significant part of their consumption towards long-term savings over multiple decades. With the high real returns that NPS appears set to deliver along with continued co-contribution until a worker retires, the new NPS-for-the-poor strategy may ensure that the value of the poor workers’ savings are sufficient to sustain them in old age. The FM anticipates this co-contribution could be that elusive ‘pull’ in PFRDA’s coverage strategy that motivates the poor towards NPS and inspires savings discipline even in a voluntary environment.

According to the 2007 round of the Invest India incomes and savings survey, over 61m low-income informal sector workers are willing to join a voluntary pension scheme structured on the lines of NPS. This group is willing to commit Rs 1,200-3,600 per annum towards retirement. Clearly, the size of the latent demand for NPS is not hindering its growth. PFRDA should be able to easily surpass the Budget target coverage of 1m low-income subscribers within 365 days.

While the potential market size is good news, the profile of the latent demand is tricky and may cause the regulator to pause and reflect. For instance, most (45m or 73%) of the potential NPS subscribers in the lower income segment live in rural India, 6.93m in small towns, 6.19m in class 1 towns and 3.3m in metros and super-metros. Less than a third of this group has access to banking or formal finance channels. Barely 4% of them are saving for old age. Other than some salaried employees in small firms, most of these workers are farmers (40%), shopkeepers (12%) or wage labourers (30%).

Since the current NPS architecture is heavily dependent on banking channels, PFRDA may need to rethink its current coverage strategy in the context of Swavalambam. Luckily, there is already enough precedent.

As a first step, it may be useful for PFRDA to analyse the reasons for the modest voluntary coverage of NPS since May 2009. At a headline level, this may simply be because the points of presence have low commercial incentives (and interest) in NPS sales. A free-wheeling discussion with all NPS intermediaries who collectively reach and service over 100m finance customers would help design a suitable incentive model that aligns the interests of subscribers, intermediaries and the government. This would be preceded by a one-to-one meeting with each of the roughly 4,000 subscribers who have already joined NPS on a voluntary basis.

As a second step, PFRDA could study why and how over 1,50,000 head-loaders, street vendors, milk farmers, rickshaw-pullers and other working poor have voluntarily joined the ‘micro-pension’ scheme rolled out by UTI Asset Management Company and Invest India Micro Pension Services instead of NPS. And that too without the ‘pull’ of a co-contribution. At a headline level again, this may simply be a result of extensive efforts at promoting those schemes among the poor in partnership with the likes of SEWA, BASIX and Janalakshmi, and in educating the poor about financial concepts like compounding, TMV and NAV-based market-linked returns.

As a third step, PFRDA could study the implementation arrangements for the Rajasthan Government’s Vishwakarma Co-Contributory Pension Scheme that already covers 50,000 working poor across 33 districts. Vishwakarma offers a Rs1,000 co-contribution just like Swavalambam. Unlike Swavalambam, however, Vishwakarma is not available to everyone in the informal sector. It uses occupational categories as a proxy for a means-test, and screening mechanisms have been put in place to limit the subsidy to the intended population. Rajasthan’s success has already motivated other states like MP, Haryana and AP to announce similar co-contributory pension schemes for the poor.

Lessons from both the failure of NPS to achieve meaningful scale and the success of the UTI-IIMPS ‘micro-pension’ model provide valuable answers to the core ingredients of a mass market for NPS. The government and PFRDA simply need to ask the right questions.

-- By Gautam Bhardwaj, The author is director of Invest India Economic Foundation