Politics of Pension Reform in India

Interesting op-ed on political realities of Indian pension reform- via Ajay Shah blog;

"To deal with this alarming situation, the National Democratic Alliance government decided to change over to a defined contribution system, in which employees get a pension related to what they have contributed, to allow employees a choice of investments for their pension savings, and to open organised pension schemes to private sector employees, self-employed and unemployed — to anyone in fact who could save for old age. It also notified a defined contribution system for new recruits to the civil service from 1 January 2005. Whilst the homework was done by the previous government, it was the present UPA government that tabled the Pension Fund Regulatory and Development Authority Bill in Parliament in 2005. However, the Bill has not been enacted; presumably its Communist allies do not like it.

It is unlikely that this government will summon the courage to enact the legislation; the Bill will die when the present Parliament comes to its natural end in 2009, or to an unnatural end earlier. It also looks as if the government will implement the new pension scheme without getting the legislation in place. If that happens, there will be some mishaps, hiccups and surprises. But maybe that is what the government is looking for — it would like to get some experience of running the new scheme before setting it in stone. In that case, there is plenty of time to take another look at the proposed pension design and to improve it. Hélène K Poirson of the International Monetary Fund took a look, and came out with her findings last month.

A question she raises concerns the absence of the first of three pillars in the Indian scheme. The first pillar in a pension scheme is a minimum guaranteed pension, the second is a pension coming out of a compulsory contribution, and the third is a pension based on additional contributions that the employee may choose to make. The Indian scheme provides for the two latter pillars, but not a minimum guaranteed pension. This may make the employees’ choice more conservative. On the other hand, the Indian government would be pretty inept at providing the first pillar. So, it would be best for us to do without it."

Related;
Financial Market Implications of India's Pension Reform
Pension Reform in India
India's innovative pension plan

Pensions Legislation
World Bank Pensions page

More than a notional improvement;

IN THE less-than-cool world of public pensions, new trends come along infrequently. For much of the past 25 years, most discussion of state pensions has been about funding: getting today's workers to save now in order to pay for their own retirement later. Systems in many countries have moved from pay-as-you-go financing, in which today's workers pay for today's pensions, towards individual accounts in which workers accumulate their own cash. With Chile leading the way in 1981, this system has proved especially popular in Latin America. Workers in a dozen countries there now make mandatory contributions to their personal nest eggs.

In the past decade or so, however, several European countries, led by Latvia and Sweden, have been trying out a new style of pension. This new approach, the subject of a weighty book just published by the World Bank*, is based on “notional” (or non-financial) defined contributions (NDCs) by workers. It sticks with pay-as-you-go financing, but mimics a funded plan in determining what benefits pensioners receive

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