By Mukul G Asher
The APY (Atal Pension Yojna) is an innovative pension scheme introduced by the Union Government of India in 2015.It is open to all citizens aged between 18 to 40 years. For those eligible (i.e. member must not be covered by any statutory social security scheme or be can income tax payer), the Union government co-contributes 50 percent of the members contribution or INR 1000 per year, whichever is lower. Such co-contribution is to be provided for five years for those joining between June 1, 2015 and December 31, 2015. The APY is operated through bank accounts, encouraging financial inclusion. There is a provision for exiting from the APY before reaching 60 years, without any penalty.
The APY combines elements of Defined Benefit (DB) and Defined Contribution (DC) methods. This is achieved by the government guaranteeing a specified amount of pension chosen by a member, but whose contribution amount, which varies with age, is also specified. Thus both contributions and benefits are defined.
This is made feasible as the difference between what is earned on investments from APY balances and minimum guaranteed amount is borne by the Union government, representing its long term contingent liability. If investment returns are higher than the minimum guaranteed, the excess is to be provided to the members as benefit, over and above the promised amount.The benefits are not adjusted for inflation.
The investment allocation of APY balances is 85 percent debt, and 15 percent equity. It is thus same as for those government employees who must mandatorily become member of the National Pension System (NPS), administered and regulated by the PFRDA (Pension Fund Regulatory and Development Authority). Thus, the APY members are able to participate in India’s financial and capital markets with high degree of confidence using the well-structured, globally compatible NPS architecture.
A member may choose to receive the chosen pension amount as an annuity at age 60 for life thus addressing the longevity risk i.e. the risk that retirement income resources may be exhausted before death. This feature is particularly attractive to the bottom two-fifths of the population in terms of income level.
The pension provided has features similar to joint life policy with return of purchase price to the nominee. Thus, the APY also addresses survivors’’ risk. This risk concerns the income security of those who survive the death of the main income earner, usually males. In India, formally recorded labour force participation rate for women is around 30 percent, much lower than the male labour force participation rate of 80 percent. In India, at birth, women as a group live longer than men by around three years (and the differential is expected to increase). Women’s participation is however understated as they do lot of unpaid family work, but it does not get recorded.
The above suggests that addressing survivors’ risk as well as the longevity risk are major positive features of the APY. So is the return of purchase price feature. It is for these reasons that the APY cannot be simply compared with other retirement products which do not have these features.
There are several refinements, relatively straightforward to implement, which have the potential to significantly improve the APY outcomes. These are stated below.
More robust data reporting needed:
As of February 4, 2017 less than two years after its implementation the number of APY members (called subscribers) was 4.27 million, with accumulated balances of INR 16.6 Billion, implying a balance of INR3911 per member. The number of members enrolling with the APY in such a short time is impressive, but the mean average amount per member needs to increase. The mean however requires a more nuanced interpretation as variance around the mean is likely to be large. Moreover, the mean amount is also affected by the choice made by the member concerning the pension option, which vary from INR 1000 to INR 5000 per month.
The PFRDA needs to consider providing publicly available regular data (at least on an annual basis) on the APY members by Age Group. Gender, Accumulated balances, average balance, and density of contribution i.e. called persistent or active members by the PFRDA. The annual rate of return obtained on APY investments also needs to be stated.
Without robust data bases available of the type suggested above, transparency, accountability, and corrective measures needed would be severely constrained. Such data would also enable researchers to undertake rigorous studies, an advantage that can no longer be foregone.
Indeed, such data robustness should also be required for other similar schemes, including the Varishtha Pension Bima Yojna (VPBY) announced in the 2017 Budget. The VPBY is administered by the Life Insurance Corporation (LIC) of India. It should be asked to report the VPBY data separately.
For APY, VPBY, and other similar schemes, including the Employees’ Pension Scheme (EPS) of the EPFO (Employees Provident Fund organization), and the NPS for government employees, periodical rigorous publicly available actuarial studies (with enough information that they can be duplicated by others) should be a requirement. The role of actuarial profession in sound design and sustainability of all pension and insurance schemes (including health insurance schemes) needs much greater recognition by the policymakers, regulators, and other stakeholders than has been the case so far.
Align asset allocation guidelines for similar Schemes
For VPBY, managed by LIC,should be permitted asset allocation choices similar to APY to minimize the fiscal contingent liability of the State. Regulatory changes required to accomplish this by the IRDA (Insurance Regulatory and Development Authority) of India merit urgent consideration. Two different investment allocation guidelines for essentially similar products suggest insufficient policy coherence and organizational co-ordination. Indeed, there is a strong case for revisiting asset allocation guidelines for all annuity products, especially given the low interest rate environment, and challenges in matching assets and liabilities for annuity products.
Consider changing division of responsibilities between the Ministry of Finance (MOF) and the PFRDA
The design and implementing regulations are currently vested with the Ministry of finance (MOF), but it is implemented through the PFRDA which has globally compatible sound pension architecture, including for managing investments of balances in a very cost effective way, and for record keeping. Any amount saved in these functions translates into improved benefits to the members. Finding ways to minimize costs of asset management and of record keeping is a challenge globally, and the PFRDA’s pension architecture has handled these issues in a competent manner.
It is suggested that the MOF continue its current role of providing broad guidelines for the APY, with details of implementing regulations and supervision be left with the PFRDA. Changes in the APY rules and regulations should be minimized.
This will have the advantage of minimizing frequent changes in the APY, which adversely impact on fairness among members, and which constrain long-term saving decisions requiring confidence and trust in the pension organizations. It will also help APY intermediaries, including banks and other financial intermediaries to minimize their costs related to enrolling and maintaining APY accounts.
Moreover, In the APY, minimum saving period is 20 years, and the benefit period could exceed that given the increased longevity. Thus data from the United Nations suggest that in 2015, the age at which the remaining life expectancy of an Indian will be 15 years or more was 65 years, and this is projected to increase to 69 years by 2050. PFRDA is the only Pension organization currently deserving of such long-term trust, through this cannot be taken for granted.
According to the data provided by the PFRDA, the share of persistent or active contributors varies across the country for 1.6 million APY members registered with 31 major banks in the country, the active contributor’s average around 70 percent of the total members. This record needs to be improved if all members are to earn the full benefits under the APY, and the coverage extended. It will also lead to better utilization of PFRDA‘s resources, and help in policy coherence and organizational coordination.
A mechanism to link bank performance to persistence of current APY contributions, and attracting new members could be considered, with appropriate incentive structures.
State governments should consider supplementing APY
As explained above, the APY is an innovative scheme, with sound pension architecture to implement it. It addresses longevity and survivors’ risks, and helps to facilitate financial inclusion. Those States that would like to improve on the benefits package could link up with APY to improve retirement income security for their residents, and help expand coverage. Using APY to add to benefit package will be ery cost effective for the State wishing to do so.
(The Writer is a Professorial Fellow, National University of Singapore, and Distinguished Fellow, Dr. Syama Prasad Mookerjee Research Foundation, New Delhi)