Social Security and Pension

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Social Security and Pension

• Viswanathan
• June 18th 2009

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• Historic perspective
• Types of pension
• Risks and Rewards
• Indian pension system
• 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
½ of Last salary
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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
for salaried persons
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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
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Types of Pensions

CLASSIFICATION OF PENSION Defined Benefit
(DB) Defined (DC)
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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
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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
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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
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Risks and Rewards
Risks in DB Pension Ageing Dependency
Ratio Political Risk Economic Risk
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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 Govts co
contribution as sweeteners To encourage retrial
savings Invest monies through UTI to give
assurances of probity and stability
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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
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Open house