General

Atal Pension Yojana: An Analysis Of Pension Schemes In India

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This Blog is written by Ujjawal Vaibhav Agrahari from National Law University, Odisha. Edited by Harshita Yadav.

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INTRODUCTION

The Government announced a new fixed benefit pension plan — Atal Pension Yojana (APY, henceforth)—for unorganized sector workers not covered by any structured social security scheme in the 2015-16 Budget address. The pension system was named by the name of Late Atal Bihari Vajpayee, former Indian Prime Minister.

Under APY, a guarantee of minimum pension is to be provided to the individual after he/she retires. In case of his/her death, the spouse is eligible to receive the same contribution. After their (spouse) death, the subscriber’s pension corpus, as accumulated at the age of 60, would be returned to the subscriber’s nominee. It was also put forward that the existing beneficiaries of National Pension System Swavalamban (NPS-S) be transferred to APY. Swavalamban is the exact scheme launched by the earlier government in 2010.

It is significant to note that Aadhaar is used in this scheme as a basis of KYC to recognize the beneficial holders, their spouse and applicants so as to prevent long-term pension rights and disability related conflicts.

How APY is funded?

The funding is provided by the government [1]: (i) fixed pension guarantee for the subscribers; (ii) would co-contribute 50% of the total contribution or Rs. 1000 per annum, whichever is lower, to eligible subscribers; and (iii) would also reimburse the promotional and development activities including incentive to the contribution collection agencies to encourage people to join the APY.

During the accumulation process, the beneficiaries can increase or decrease their sum according to monthly payment options available, and this facility is only possible once in a year at the beginning of financial year i.e. April. It has also promised that a lot of political attention is given to these very important issues of old-age income security, and this is testament to the rise of the NPS and now the APY. If all of the NPS-S design shortcomings were to be resolved in the APY, this would mean that the most disadvantaged households would be able to create a pension corpus that would have substantial old-age income protection for them.

DIFFERENCE BETWEEN SWAVALAMBAN & ATAL PENSION YOJANA

Atal Pension Scheme is quite different from the National Pension System launched earlier. No fixed return is guaranteed under NPS-S scheme as subscribers contribute in the form of investment in “government securities”, “corporate bonds” and “equity instruments”. Whereas APY guarantees fixed benefits to the subscriber which will be provided monthly which lies between Rs. 1,000 to Rs. 5,000 which depends on their share of contribution they made earlier. Also, under APY, the government promises 50% subscriber’s contribution or Rs. 1000 whichever is the lower amount. This means this scheme is based on graded matching where if one person gives lower than Rs. 1000 will get matching amount which wasn’t in case of National Pension System (Swavalamban) as to get the benefit of the same amount as deposited he has to give Rs. 1000 as contribution NPS-S (and under APY Rs. 2000).

ATAL PENSION YOJANA & ITS OBJECTIVES

APY is an effort to address the issue of having sufficient retirement income in a sustainable way [2]. The APY is extremely concerned with the safety of unorganized sector employees and promoting saving for their retirement on a voluntary basis. A pension scheme aimed at touching the unorganized sector whose aim is to provide people who do not have access to basic facilities in their old age with a sense of social security.

The introduction of the new scheme will be administered by the Pension Fund Regulatory and Development Authority (PFRDA), applicable to “age brackets between 18 and 40 years, providing subscribers with a fixed pension of Rs. 1000, Rs. 2000, Rs. 3000, Rs. 4000 and Rs. 5000 per month after the age of 60 years, subject to contribution and age at the time of entry into the pension scheme.”[3]

Unorganised sector: aloof from governmental schemes

Unorganised sector who are 88% of total labour workforce (47 crore approx.) is a sector that has been minutely looked upon by the government. Hence the APY is a boon for them as it addresses their longevity risks and encourages voluntarily savings for retirement. The Government currently is so concerned about the income of old age income security of the unorganised working class people who are basically poor. The government is also focused on encouraging them to be beneficiary to this scheme through maximum participation.

LOOPHOLES IN ATAL PENSION YOJANA

The amount collected under APY is controlled by PFRDA appointed Pension Funds as specified in their investment pattern by the Government. The investor has no option about either the investment strategy or the Pension Plan.

Unclear vision

“Old wine in a new bottle?”

The scheme APY seems nothing but a copy paste of NPS-Swavalamban (NPS-S) Scheme which is active since 2010 and its clause related to the pension is somewhat same as the current APY pension scheme launched by the government. Swavalamban scheme also works on unorganized sector. Though it has taken root over the last few years, the big problem lies with its design and process. The brochure of the scheme states, “coverage under Swavalamban Scheme is inadequate mainly due to lack of clarity of pension benefits at the age after 60. Hence the current government has launched the APY in the budget of 2015-16.”[4] Clarity of pension benefits may be viewed as procedure consistency for obtaining benefits, or assurance of the amount of compensation. The government’s intent seems to be to migrate all of the existing NPS-S to the APY [5].

From what the government has uttered it isn’t clear that this approach is right. The government should have made us understand the reason after examination of lessons gained through NPS-S over past 4 years and that would have helped not only in creating a better understanding but also it would have helped design a better response. Also it should be noted that under this scheme there is provision for self-contribution separately from pension guarantee.

Age Restriction

One of the major problems in Atal Pension Scheme is, it has set a very small boundary of age where the pension system will operate. It has provision for people of age 18-40 years and contributing up to 60 years, people who are already 60 can’t be beneficiary of this scheme.

Price of the guarantee

Apparently innocent guarantees will prove horrendously costly when viewed in full (e.g. Shah, 2003). The APY appears to be motivated by the government’s desire to ensure that a member receives at least a pension of Rs. 1,000 if he continually contributes. Although not explicitly specified, the APY appears to be a minimum return guarantee that will ensure that accumulated retirement savings do not fall below a given value. There are different types of guarantees, and there are many ways to build minimum guarantees of return. For instance, an absolute return guarantee rate promises a pre-specified return rate, whereas a relative return guarantee rate promises a return close to the average of all the funds. There was no articulation of the reason for choosing this particular design, and the calculations which informed the decision. The subscriber may actually be getting a sub-optimal return under the APY. Not surprisingly, since all guarantees come at a cost. However, the application of mind must be shown by policy makers, i.e. the class of guarantees evaluated, and the logic that led to this choice. Contributions under APY shall be invested in accordance with the investment rules provided by the Finance Ministry, Government of India. The investment criteria are not yet explicit, and how they will fund the APY guarantee.

Safeguards against arbitrary increases

Governments are tempted to boost the benefits before an election. Seemingly insignificant adjustments are announced, adding up to several GDP percentage points. Any guarantee program calls for an elaborate array of safeguards to protect against future reckless actions. The APY has no safety features. It does not allow governments to submit internal audit estimates until any changes are made to the design. The Employee Pension Scheme (EPS) is an example of a defined benefit guaranteed return plan that runs into funding difficulties. Estimates suggest that “the EPS is facing a shortfall of Rs. 54,000 crore, and due to these funding difficulties, a number of changes in scheme design have now been introduced.”

Structure of the procedure

Chaos has been going on in the country on how APY is going to work and what will be the blueprint towards its working. The APY was originally to be sold via the same aggregators that distribute the NPS-S. Further documents came which iterated that only bank account holder will get the benefit of the scheme. A suitable option was availed to the NPS-S customers so that they could join APY. Is this putting the burden on the aggregators to open bank accounts for NPS-S customers? What happens to those who want the NPS-Lite to proceed, i.e. using the NPS without the co-contributions? In that case, the PFRDA will establish well-defined standards of ability and care that aggregators are supposed to practice towards a customer as the aggregator would inevitably end up playing an advisor’s position while deciding whether to opt out of the APY, or to continue only the APY, or to continue the APY along with NPS-Lite.

Indecorous process

By committing to the draft Indian Financial Code’s Handbook on adopting enhancing governance and non-legislative elements, Indian finance has taken a major move forward. The procedural requirements in the Handbook for framing legislation include a statement of objectives and an overview of the cost benefits of each of the provisions. This process could have prevented many of the APY’s mistakes. Even now, applying that process to APY is not too late.

INCENTIVES OF PENSION SCHEMES IN INDIA & THE UNDERLYING CAUSE

The steady increase in the informal sector and the aging of the population increases the need for an appropriate pension scheme for individuals. Gender inequality is one of the problems in pension scheme which leaves a great impact on the lives of women approaching for pension. It is useful to note that the current gender gap is about 16.68% [6]. Specific pension schemes favour the course of male life and job patterns to varying degrees, indicating that the nature of the pension system matters and that pre-existing differences can be harnessed (instead of reproduced) [7].

The difference which lies between formal and informal sector is also a hindrance in the India Pension System. Workers and employers in the formal sector are entitled to a definite pension payment at the end of their working life, but the only choice remains for informal sector employees to establish recurring and fixed deposits.

Major tussle between public and private sector is another hurdle Indian Pension scheme has to go through. The employees working under government have much better pay scale and a structured pension system than the private company employees. Thus, it influences the pension scheme and the beneficiaries providing unequal benefits to two sectors.

CONCLUSION

Atal Pension Yojana was a good step by government and it is also promising that a lot of political attention is being given to these very important issues of old-age income security, and this is testament to the rise of the NPS and now the APY. If all of the NPS-S’ design shortcomings were to be resolved in the APY, this would mean that the most disadvantaged households would be able to create a pension corpus that would have substantial old-age income protection for them.

Taking a dig at the changes put in earlier, it could be said that these changes were introduced in an ad-hoc manner and could therefore not resolve the gap between problems and effective solutions. These ad-hoc systems failures indicate there are no ways to fix those issues. Therefore, the policymakers must take a new perspective and the development of pension rejuvenation strategies. Strict scrutiny should be done as long-lasting reforms adequately supported by systematic approach are required in the Indian Pension System.

The rising trend in the defined-benefit, non-contributory, public pension schemes investment pattern needs to be reviewed. Reforms in investment policy and performance of provident and pension funds are required so as to Provide an appropriate replacement rate in a sustainable path for pensioners now and in the future. Furthermore, policies on withdrawal of accrued balances need to be checked. A combination of policies such as austerity on guarantees of benefits, dependency on increased financing, relaxation of investment requirements, promotion of private participation, enhancement of program performance and improvement of regulatory capability may help avoid the impending pension crisis and facilitate greater economic protection for the aged. The advantage of such a pension plan would also possibly promote aggregate savings rates and boost the growth of capital markets.