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RIP New Pension System

Recent developments suggest that the NPS will never be the kind of good retirement benefit system it was supposed to be…

Back in 2004, Mutual Fund Insight, the magazine I edit, carried a cover story on the New Pension System. It was a story written in some excitement because all of us at Value Research genuinely thought that the citizens of India were on the verge of getting a real retirement benefit system. The article actually asked readers to prepare to rejig their investment strategy in anticipation of the NPS's imminent launch. How naïve we were!

Eight years have gone by since then. It seems now that the New Pension System is all but dead; at least in the form that it can do any of the good it was supposed. Four days ago, the Trinamool Congress put its foot down on the issue with a great deal of finality and firmness. The TMC (along with some other parties, apparently) wants the government to guarantee the returns on NPS investments. The guaranteed returns issue was first raised by the Yashwant Sinha-led parliamentary standing committee on finance in October last.

Back in the 90s, the initial motive behind the new system was to bring down the government's future pension liabilities. The New Pension System (NPS) was talked about mostly as a better way to pay pension to government employees. But over the years, increasingly greater attention is being paid to the NPS as a retirement savings solution for those in the unorganised sector and for the self-employed.

Anyhow, eight years is nothing actually. The first public discussions about the need for a retirement benefit system actually started in the mid-90s, practically in the first flush of the economic reforms. By the time the NDA government set up an interim pension authority in 2003, more than half a decade had already gone by. So from the first stirrings of the new pension system till now, about 15 to 17 years have gone by. Think of someone who was starting on a first job at the age of 25 years back then. He would have read in a newspaper about how this new pension system would give him a larger retirement kitty. That person is now 42 years old. Half his working life has gone by. The way compounding works, at least two thirds of the benefit he would have got on his eventual retirement has been lost. And that's only taking into consideration the time that is gone past.

As things stand now, this person could be 50 years old before the NPS will launch. Even that might be a shade optimistic. It may actually be time for him to retire by the time anything happens. If 17 years can go past once, then surely they can go past twice.

However, please don't see this as yet another one of those 'policy paralysis' issues that the newspapers are full of. The NPS is an example of a much longer story than any paralysis that anyone has been suffering from over the last year or two. It's about the human cost of reforms not happening, or being delayed. For the people whose lives would have been changed, the sheer amount of time that goes by becomes a tragedy, even if something does eventually move.

On the NPS, it's now hard to see why a minimalist law should not be brought in, a sort of a Common Minimum NPS, to resurrect an old phrase. At the very minimum, the structure is in place, and NPS options that are generally acceptable can be launched right away. The more market-oriented options can be added later, or perhaps made entirely discretionary. As time goes by, things could well change as the market-oriented options build up a track record of performance. Maybe that would also take 17 years, but at least they would not be a wasted 17 years. Whole lives are going by, waiting for the obvious things to be done.