Less pension tension with hybrid option

The government is trying to make the National Pension System (NPS) more acceptable to state governments that are cutting back on their current co-contributions by reverting to the earlier defined benefit plan. This short-term revenue benefit increases the appeal of the unfunded old pension scheme that imposes a larger fiscal burden as life expectancy improves. The defined-contribution NPS is, by contrast, more sustainable, but may have to offer some assured return products to increase its appeal among stakeholders. This mixed model can be built by imposing capital requirements on pension fund managers and isolating defined-benefit pensions from the rest. India has another decade to fine-tune its pension portfolio - the first cohort of government employees in NPS retires in 2034.

India's demographics allows it policy space to offer retiring government officials and the public choice over defined-benefit or defined-contribution pension. The burden in the first instance is not expected to be as heavy because of a young workforce and a low old-age dependency ratio. India is not likely to face the fiscal strain currently afflicting economies with rapidly ageing populations. It will also have in place a system of defined-contribution pension that can demonstrate its innate viability over the legacy model. Choices will be better informed when pension managers offer both products as political arguments favouring one over the other yield to economic ones.

An alloyed pension model will also have to steer the Employees' Provident Fund Organisation (EPFO) further towards equity exposure to take some pressure off the fisc. EPFO's hesitation becomes more stark with the presence of foreign pension fund managers in the Indian equity market. NPS should, over the long haul, deliver stronger returns. Even-handed portfolio management blurs the distinction between defined-contribution and defined-benefit pensions. NPS is going through an overhaul to increase its acceptance. EPFO needs similar treatment to make it more efficient.