PFRDA Concept Note on Auto Enrolment for increase in pension coverage in India
Pension or old age income provision is an important component of the social safety net. It provides a mechanism to alleviate or reduce the risk of old age poverty and a means to smoothen lifetime consumption to maintain living standard after retirement. Pension system must be affordable to the subscriber and fiscally sustainable to the economy so as to achieve the primary objective of old age income support. The need for pension reform in India was driven by the budgetary strain of civil services unfunded defined benefit pay as you go pension liabilities on the one hand and the need to expand the coverage of old age income security to the vast unorganized sector on the other.
2. To adapt pension systems to fiscal imperatives and demographic trends, and pursuant to reports of various expert committees, India made a conscious move to shift from the defined benefit pay-as-you-go public pension system to defined contribution funded pension system initially called the New Pension Scheme now renamed as National Pension System (NPS). NPS was made effective from 1stJanuary 2004 initially for Central Government employees other than the armed forces . Subsequently, from May 2009, NPS was extended to the private sector including the unorganized sector on a voluntary basis. In October 2010 government launched the NPS Lite – Swavalamban Scheme for the under privileged workers in the unorganized sector. In May 2015 the Atal Pension Yojana (APY) was launched with a minimum guarantee pension and cocontribution by the Government of India (for certain eligible subscribers) focusing primarily on the under privileged workers in the unorganized sector. With these efforts, the coverage of the NPS under the voluntary segment and APY as measured by the enrolments has been picking up.
3. As on 30th June 2016 there were 12.9 million subscribers with Assets Under Management of Rs.1.32 lac crore. Central and State Government employees account for 36.6% of the total subscribers and 88.6% of Assets Under Management under NPS and APY. Corporate and Unorganized Sector (all citizen model) just 5.7% of the subscriber and 9% of Assets Under Management. NPS-Lite/ Swavalamban and APY accounted for 57.7% of the subscribers and just 2.3% of the Assets Under Management. A perusal of the last column of Table 1 reveal that the average Assets Under Management per subscriber were Rs.1,02,000. Segment wise the average AUM per subscriber were Rs. 3.09 lakh for central government NPS beneficiaries/ employees, Rs.2.12 lakh for tate government NPS beneficiaries/ employees, Rs.2.12 lakh for the corporate NPS beneficiaries/ employees, Rs.57,000 for unorganized/ all citizen beneficiaries, Rs.5000 for NPS Lite/ Swavalamban subscribers and Rs.3,000 for APY subscribers. The coverage under the corporate and all citizen model has not been an encouraging one. This is partly due to NPS not being fully extended the EEE tax treatment i.e. exemption from tax of contribution, exemption of returns during accumulation and exemption of benefits on superannuation. It is felt that as NPS competes with retirement products like EPF, CPF, superannuation funds etc., once a level playing field is provided to NPS viz-a-viz the other products, the response of the corporate sector and high income group self-employed individuals such as lawyers, doctors, accountants, etc would be much better than what it is now. Under NPS Lite/ Swavalamban while there are fairly large numbers of subscribers registered, the average per head AUM is just Rs. 5000. It is a moot question whether their accumulated pension corpus would be large enough to get a pension of say Rs.1000 per month even after being in the system for 20-25 years. As on 30th June 2016, the number of subscribers covered under different segments, the corpus/ contributions mobilized from them and the assets under management