| First Report of Project OASIS
(Old Age Social & Income Security)
Introduction, Maneka Gandhi
Foreword, Surendra Dave
Background
Problems and Diagnosis
Empowering Provident Fund and Members
Empowering the Employees Pension Scheme
Empowering the Public Provident Fund
Annuities
National Senior Citizen's Fund
Introduction
The least noticed of the destitute in India are the elderly. Millions of elderly in India
are trapped in misery through a combination of low income and poor health.
The traditional support structure of the family is increasingly unable to cope with the
problem. In a world where the joint family is breaking down, and children are unable to
take care of their parents, millions of elderly face destitution. The emerging demographic
profile and socio-economic scenario of the country indicate that matters will worsen
dramatically in the years to come.
While there is a need to initiate poverty alleviation programs designed to support the
elderly, the gigantic dimensions of the problem defy an easy solution. The steady
elongation of life expectancy and declining birth rates are inexorably taking us towards
an India where there will be such a large number of aged persons, that a poverty
alleviation programme, which aims to pay even a modest subsidy would require a staggering
expenditure much beyond the capacity of the government.
In this situation, the Government realises that poverty alleviation programmes directed at
the aged alone cannot provide a complete solution to the problem. Faced with such large
numbers, it is apparent that the problem will have to be addressed through thrift and
self-help, where people prepare for old age by savings accumulating through their decades
in the labour force. The role that the Government can play in this enterprise is to create
an institutional infrastructure to enable and encourage each citizen to undertake this
task.
Project OASIS, the first comprehensive examination of policy questions connected with old
age income security, took birth in this background. The basic mandate of the Project is to
make concrete recommendations for actions which the Government of India can take today, so
that every young person can genuinely build up a stock of wealth through his or her
working life, which would serve as a shield against poverty in old age.
It is interesting to note that India already has a high contribution rate to the provident
fund system from amongst salaried employees in large establishments. The challenge
therefore is not so much to ask workers to save more but to convert high saving rates into
old age security. To this end, the Report of Phase-I of the Project recommends: (a) limit
early withdrawals, (b) deploy superior financial portfolio management and information
system, so as to obtain higher rate of returns, (c) expand the coverage of existing
provident fund systems so as to reach more workers, and, (d) improve the customer service
of the existing provident fund systems.
The topicality of the Project OASIS is enhanced by the fact that 1999 is being observed as
the International Year of Older Persons. The Chairperson of the Committee, Dr. Surendra A.
Dave, former Chairman of Unit Trust of India, and the members of the Committee have done
well to have produced the Report of the first phase of Project OASIS in a short
time-frame. The Project is being ably coordinated by the Invest India Economic Foundation.
Project OASIS is a project of national importance and we should all put our minds and
energies to the task of rapidly converting the Committee's recommendations into reality.
Maneka Gandhi
Minister of State (IC)
Ministry of Social Justice and Empowerment
Government of India
01 February, 1999
Foreword
India is in the phase of a rapid demographic transition. Life expectancy is increasing
while birth rates are on the decline. The share of population above the age of 60 is
growing at a rapid rate. Those who cross the age of 60 are expected to live till or beyond
the age of 75. This has not sufficiently dawned in the minds of our people. They tend to
be myopic and are not saving sufficiently for old age, a period of 15 to 17 years beyond
the age of retirement.
There is a serious threat that persons who were not below the poverty line, might sink
below the poverty line in their old age, since not enough savings have been made by them.
On the other hand, they have to incur heavy expenditure on health, neglect of which will
only worsen their quality of life. Destitution and ill health could lead to rampant
devastation of life of aged people under such circumstances.
India has been among the enlightened nations which recognised the need for social security
during old age quite early. The Provident Fund Act was introduced way back in 1925 for
select public enterprises. We have the Employees Provident Fund and Miscellaneous
Provisions Act (EPFMP) of 1952 which covers 177 industries today. From 1995, workers
covered under the EPFMP Act, 1952 are also covered by the Employees Pension Scheme. While
these have been laudable steps, and are serving the working class well, their coverage is
woefully small, with only 11 percent of the working population in India covered by them.
There is also the Public Provident Fund (PPF) scheme for self employed and those not
covered by the EPFMP Act. Though good in intention, the PPF has not been well publicised,
and as a consequence, its clientele is basically confined to large cities. It is not
easily accessible either.
We are grateful to the Ministry of Social Justice and Empowerment, Government of India for
initiating Project OASIS, Old Age Social and Income Security, for focusing on this vital
and emerging area of concern, and to comprehensively examine the existing institutional
mechanism and make recommendations for concrete action that the Government should
undertake.
I was asked to chair the Project OASIS Expert Committee comprising of the following
members: Anand Bordia, Joint Secretary, Ministry of Social Justice and Empowerment; R.S.
Kaushik, Central Provident Fund Commissioner, Ministry of Labour; C.S. Rao, Joint
Secretary, Ministry of Finance; Ajay Shah, Indira Gandhi Institute of Development
Research; A.P. Singh, Deputy Secretary, Ministry of Social Justice and Empowerment; and
Nalin Thakor. Gautam Bhardwaj of Invest India Economic Foundation served as the
Member-Secretary of the Committee.
The Committee sponsored some research studies by experts on various aspects of a social
security system and organised a technical conference to discuss these findings by inviting
experts in the profession, senior executives from financial institutions and the
government, and practitioners in the industry. The conference was also attended by experts
from The World Bank. These research studies will shortly be published in book form.
As the work progressed, we realised the enormity of our task of making social security
comprehensive as well as adequate. Hence we decided to break the Project into two phases.
The first phase will cover existing mechanisms for social security - provident funds,
pension schemes and Public Provident Funds. The second phase will cover other issues,
including a new voluntary pension system, individual choice of diverse funds and fund
managers, Regulatory Authority for the Pension Fund industry and need for a Redistributive
Pillar.
We are overwhelmed by the remarkable reception that Project OASIS has received from all
quarters. Everyone we met recognises that this is a very important problem and needs to be
addressed soon. We have a lot to learn from the kind of reforms that other countries have
adopted and from their experiences. We should not turn a blind eye to the experiences of
the countries that have conspicuously brightened the lives of their old. Our myopic wisdom
and failure to see what has happened or what can happen beyond a few years should not
prevent us from breaking away from some of our past policies and take new initiatives.
We are immensely grateful to Industrial Development Bank of India (IDBI), ICICI Limited,
Unit Trust of India (UTI), and Life Insurance Corporation of India (LIC) for providing
financial support for this project. I am also thankful to all Committee members for their
efforts and to all those who have actively interacted with the Committee. We trust we have
provided a feasible and acceptable blueprint for action in this Phase-1 Report of Project
OASIS.
Surendra A. Dave
Chairman
Project OASIS Expert Committee
01 February, 1999
Background
1.Populations, worldwide, are ageing. In India, while the total population is expected to
rise by 49% (from 846.2 million in 1991 to 1263.5 million in 2016), the number of aged
(persons aged 60 and above) is expected to increase by 107%, from 54.7 million to 113.0
million, in the corresponding 25 year period. In other words, the share of the aged in the
total population will rise to 8.9% in 2016 (from 6.4% in 1991). Population estimates
further suggest that the number of the aged will rise even more rapidly to 179 million by
2026 - or to 13.3% of the total Indian population of 1331 million.
2.Today, males and females in India at age 60 are expected to live beyond 75 years of age.
Thus, on an average, an Indian worker must have adequate resources to support himself for
approximately 15 years (and his wife for an even longer duration) after his retirement.
3.Traditionally, governments and societies provide economic security during old age
through pension provisions. Sound pension systems form a social safety net for reducing
poverty during old age. However, a rise in the number of older persons often causes a
corresponding increase in government expenditure on non-contributory pensions and health
services - since health and pension spending rise together. Higher government spending on
old age security has often been at the cost of expenditure on other important public goods
and services and has increasingly been a serious drain on government finances.
4.As per the 1991 Census data, India has an estimated 314 million workers (9.4% employed
in the organised sector and the balance 90.6% employed in the unorganised sector). Of the
working population, 15.2% (47 million) are regular salaried employees while over 53% (166
million) are self employed and 31% (97 million) are casual/contract workers.
5.Of the salaried employees, approximately 23% (11.1 million) are presently employed by
the Central, State and UT Governments and Departments (including post & telegraph,
armed forces and railways) and are eligible to a non-contributory, defined benefit
pension, funded entirely by the State. Government spending on non-contributory pensions is
an enormous strain on revenues and will only increase over time with an ongoing increase
in benefits as well as increasing life expectancy of the population (including current and
potential pensioners).
6.Approximately 49% (23.18 million) of the salaried (non-Government) workers in the formal
sector are covered by Provident Funds. These mandatory, employer centric, defined
contribution plans (including EPFO, Coal Miners Fund, Seamen Fund, et al) cover only 177
industries and classes of establishments notified by the Government. In addition, within
these specified industries, only establishments employing 20 or more persons need to
provide provident fund benefits to employees. Further, employees drawing a monthly salary
of 5000 or more have the option to opt out from contributions to PF.
7.Over 28% (13 million) of the salaried employees and approximately 89.2% (280 million) of
the workers (including self-employed and farmers) are not covered by any pension scheme
that enables them to save for economic security during old age. Though the Public
Provident Fund (PPF) was introduced in 1968-69 to provide a facility to self employed
persons to
save for old age, it today serves only as a medium term savings instrument with liberal
withdrawal facilities and tax benefits.Thus, the present formal provisions for old age
income security in India cover less than 11% of the estimated working population.
8.However, even for these individuals, incomes generally fall below poverty line during
old age despite the high levels of contribution (over 20% - among the highest in the
world) prevailing in India. This is primarily due to low real returns and generous
withdrawals. For instance, in 1996-97, Rs.2047 crore was prematurely withdrawn by 1.20
million provident fund members to fund marriages, illness, housing and purchase of
insurance policies. In the same period, a total of Rs.3306.15 crore was paid out to 1.32
million outgoing provident fund members on account of retirement, death or leaving service
- indicating an average lump-sum accumulation of Rs.25,000 per member.
9.Over the last decade, provident funds in India have earned a return of little over 2.5%
over inflation for their members (as against 11% in Chile). On the other hand, the
long-run average rate of return on the equity index in India is 18.5%, which has the
potential to revolutionise the wealth accumulation over a worker's lifetime. The average
wealth that is obtained by
investing Rs.5 per working day into the equity index, from age 25 to age 60, works out to
Rs.36,00,865. Over such a long term horizon, there is a 99% chance that equities
outperform bonds.
10.While we witness an increase in the number of aged, and insufficient accumulations for
old age, the traditional, informal methods for income security, such as the joint family
system in India, are increasingly unable to cope with the enhanced life span and medical
costs during old age. There is growing stress in the family system and there is an
immediate need for
introduction of formal, contributory pension arrangements which can supplement informal
systems. This problem is particularly important in India, which will enter its demographic
transition into increasing number of aged persons at lower income levels than those seen
in other countries which have since long introduced systems to cope with the problems of
an
ageing population.
11.The research studies commissioned by Project OASIS suggest that a pension provision for
India, considering the huge diversities in income, savings capacity, literacy and the
variety of employment categories will necessitate the formation of a multitude of pillars
including the existing, mandatory, defined contribution provision of the Provident Funds,
the voluntarily
funded PPF, as well as a new contributory pillar (primarily for those not presently
covered by any other formal pension provision).
12.However, most individuals are myopic during their earning lifetimes with regard to
saving for their old age and may thus be reluctant to save adequately for their old age
income security in a purely voluntary environment. We must educate people that old age is
inescapable and that saving for old age could be a painless process if started early in
life. It is thus desirable
for the prevalent mandatory, contributory pillar - provident funds, which have been
performing a singularly significant and sustained role in enabling employees to save for
their old age - to increase its coverage, improve returns and reduce its potential
dependence on any (non-funded) government subsidies.
13.The research and recommendations under Project OASIS have been segregated into two
phases. The Report of Phase-I has concerned itself with rationalising and further
improving existing provisions of the Employee Provident Fund (EPF), the Employee Pension
Scheme (EPS) and the Public Provident Fund (PPF). The recommendations are aimed at
enabling these provisions to more effectively fulfil their objectives of providing life
long economic security during old age to their members and better realise their full,
intended potential by removing systemic distortions and discriminations. The Phase-I
report also recommends the formation of a National Senior Citizen's Fund for encouraging,
catalysing and complimenting private sector efforts for betterment of life of senior
citizens in the country and for advocacy, research and new initiatives.
14.Phase-II will focus on research and recommendations for:
1.Non-contributory Government pensions (Central and State Governments, railways, armed
forces as well as post and telegraph).
2.Occupational and private pension plans
3.A new, fully funded, contributory pension provision for the balance (uncovered) workers
including casual/contract workers, self-employed, farmers, etc.
4.Consolidation and strengthening the existing, publicly funded social welfare schemes
like the NSAP.
5.A blueprint for establishing cost-efficient and effective institutional infrastructure
mechanisms for India's pension provisions with the objective of (a) regulating and
monitoring, (b) easy and universal access, administration, service, and delivery, (c)
advocacy, and (d) regular evaluation of the system's performance.
Problems and Diagnosis
1.Economic security during old age should necessarily result from sustained preparation
through lifelong contributions. The government should encourage fully funded old age
income security systems that emphasise the values of thrift and self-help. The government
should step in only in case of those who do not have sufficient income to save for old
age.
2.The existing provident fund or pension programs accessible to Indian workers do not
adequately solve the problem of income security in old age. For an individual retiring at
age 60 with the prevailing balances (average Rs. 25,000), the provident fund system can
only be a minor aspect of income security in old age.
3.The contribution rates of India's workers are already amongst the highest in the world.
There is hardly any scope to transform income in old age by raising the contribution rate.
4.The central factor which should be at work in saving for old age is the steady
compounding, at the highest possible rates of return, of contributions through a person's
working life. This steady accumulation, without any withdrawal, can generate a stock of
wealth at retirement which may be entirely out of line with common intuition. For example,
saving Rs.5 per working day from age 25 onwards leaves the worker with Rs.6,78,307
(measured in 1999 rupees) at age 60 at a nominal return of 12%. These numbers remind us
that low contribution rates are not the essence of the problem. Today, in India, a
contribution rate of Rs.5 per working day is possible for everyone above the poverty line
and a person at age 60 with a
stock of wealth of Rs.6,78,307 would not be destitute.
5.The terminal wealth at age 60 is highly sensitive to the rate of return. An improvement
of one percentage point in the rate of return - i.e. from 12% to 13% - yields a corpus at
age 60 of Rs.8,74,065. This is an increase of 29% as compared with what is obtained at
12%. If the interest rate goes up from 12% to just 14.75%, it yields a doubling in the
corpus at age 60.
Improving rate of return by such percentage points, without sacrificing long-term safety
of funds, is possible by appropriate modifications in investment guidelines, and by
entrusting funds to professional managers.
6.Such accumulation requires two ingredients: (a) high rates of return and (b) steady
accumulation, without either withdrawals or interruptions to savings. The challenge lies
in finding institutional mechanisms where individuals actually do save steadily through
their working careers, and earn the highest possible rates of return for their wealth, so
that the corpus created at age 60 is able to offer income security during old age.
7.The weaknesses of existing schemes lie in these two directions: low rates of return and
poor accumulation. The rules governing withdrawal are excessively permissive, thus
generating poor accumulation of wealth and a failure to harness the benefit of compounding
over decades and provide enough for old age. When workers view their contribution as an
escape from tax rather than savings that they benefit from, they would have strong
incentives to withdraw early.
8.A similar problem is faced after age 60. We are increasingly in an environment where a
worker at age 60 can expect to live beyond age 75. If wealth is rapidly spent away, then
individuals may be destitute late in their lives. This process could be checked by access
to a competitive market for annuities.
9.Systemic distortions and preferential treatment to certain provisions is undesirable and
we need to strive towards creating an equitable environment and simplified provisions to
encourage universal coverage both for employed persons as well as self-employed persons.
Presently, contributions as well as interest earned of them are not taxed both in case of
pensions and provident funds. But pensions, in the hands of, receivers are taxed whereas
provident funds (including PPF) are not. This is a disincentive for contributory pensions
and needs to be rectified. There is also a strong justification to tax receipts of
accumulated provident funds.
10.Once the core problems of the system, which lead to poor accumulation of wealth at age
60, are adequately addressed, the incremental expansion of the coverage of the system
would help raise the number of workers who save for old age in this
fashion.
Empowering Provident Funds and Members
Encourage Accumulations
1.Contribution rates to provident fund, pension and other social security systems
(Employees Social Insurance Scheme and Employees Deposit Linked Insurance Scheme) are
already quite high. The Committee is of the opinion that there is no need to step them up
further.
2.Premature withdrawals should only be permitted in the event of permanent disability,
death, or for specific purposes relevant for old age income security (e.g. housing).
Individuals who opt for self-employment or take up employment at an establishment where
provident fund provisions are absent, should be discouraged from withdrawing their
accumulations
before age 60. They may transfer their accumulations to an Individual Retirement Account.
3.Premature withdrawals (before age 60) should attract a flat, 10% withdrawal tax,
deductible at source. This disincentive will also encourage members to consider
alternative fund sources (banks, housing finance companies and medical insurance) to
supplement their savings for other needs. Provident fund withdrawals should also be taxed
at the rate of 10% after retirement over and above an initial exemption of Rs.1,00,000.
4.The portion of accumulations at maturity that are used for purchasing an annuity (from
annuity providers registered with the IRA) or for other investments specified in Section
54E, should however be exempted from the 10% withdrawal tax. The annual income from
annuities should however be taxed at prevailing rates.
5.Delayed receipt of provident funds should be permitted. While a member may stop
contributing to the provident fund from age 60, he should be allowed to accumulate till
the age of 65 - thereby enabling the member's accumulations at age 60 to further benefit
from compounded returns - resulting in a larger annuity at age 65, should he decide to opt
for it.
Improvement in Rate of Return
1.The present concept of limited, assured returns should be abolished. Instead, returns
should be determined from year to year depending upon annual earnings. This will remove
the upper limit for returns over a multiple decade investment horizon to members and also
eliminate the need for any potential government subsidy.
2.To encourage maximisation of returns on investments during accumulation, the present tax
on earnings over 12% should be abolished.
3.Fresh provident fund accretions, as well as earnings from investment of existing funds
should be managed by professional, competing fund managers registered with the Securities
and Exchange Board of India (SEBI).
4.All exempted establishments should be mandated to engage a professional fund manager
registered with SEBI, to manage their existing and incremental provident fund
accumulations for superior returns and better risk management, and more effective
governance.
5.Investment guidelines for exempted and non-exempt provident funds should be prudently
liberalised and investment portfolios further diversified in order to obtain superior
returns and better risk management. Trading of securities in the secondary market should
be permissible. Initially, investment guidelines for fresh accretions as well as earnings
from investment of the existing fund should be modified to allow investment of up to 20%
of the funds into investment grade corporate debt and up to 10% in domestic equity.
Domestic equity investments should initially be permitted only through index funds on
either the NSE-50 or the BSE National indices.
6.The Boards of Trustees of exempt and non-exempt provident funds should be made more
compact and effective. The Boards should generally not be larger than 15 persons, of whom
at least one-third should have an advanced degree and/or experience in finance or
economics.
Increase in Coverage
1.The existing restriction limiting provident fund contributions to 177 industries/
classes of establishments should be abolished.All establishments should be covered by
provident funds.
2.The minimum number of employees in an establishment should be lowered from 20 to 10, and
eventually to 5.
3.The wage ceiling of Rs.5,000 should be abolished; all employees in eligible
establishments should be covered.
4.Intensive efforts should be undertaken to educate people about the need for, and
benefits from, security schemes, and not to
resort to early withdrawals.
5.These steps will collectively increase the number of establishments covered by provident
funds by 0.26 million - thereby
benefiting an additional 6.25 million individuals who will become eligible for provident
fund and the employee pension
scheme.
Others
1.Each provident fund member should be allotted a unique identification / account number
spanning across all Provident Funds - for comprehensive portability of account during job
changes and temporary unemployment.
2.Lump-sum contribution both by the employer and the employee for the last 3 month's
instalment (before retirement of employee) should be made mandatory to facilitate
timely completion of administrative procedures and prompt disbursal of accumulations on
retirement.
3.The "Provident Fund Account" should be renamed "Employee Retirement
Account (ERA)'' to clarify its true objective.
Empowering the Employee Pension Scheme
1.The system of using competing professional fund managers, prudently liberalised
investment guidelines, and improved governance covered in the previous chapter, should
also be applied for pension funds. This will introduce specialised agencies for fund
management (professional fund managers registered with SEBI) and for annuity provision
(annuity providers registered with the Insurance Regulatory Authority).
2.The presently limited, assured returns should be replaced by market-determined rates of
return.
3.The Government's contribution of 1.16% towards pension accruals should be gradually
withdrawn over a period of maximum three years. In the interim, this contribution should
be credited to the National Senior Citizen's Fund.
4.The vesting period for pensions should be 10 years. Breaks in contribution should be
permissible - provided they are made up later with the correct interest penalty. Lump-sum
topping-up by individuals, in case of a shortfall in the minimum contribution period,
should be permitted.
Empowering the Public Provident Fund
1.The "Public Provident Fund" should be renamed "Individual Retirement
Account (IRA)" to focus on its objective.
2.The provident fund system of using competing professional fund managers, prudent
liberalisation of investment guidelines, and improved governance should also be applied to
the Public Provident Fund. A professional Board of Trustees should be appointed to oversee
the investment and administration of the fund.
3.The 10% tax on early and final withdrawals on provident funds should be applied to all
permissible withdrawals from the PPF as well. As in the provident funds, this tax should
not be levied on the portion of accumulations retained in the IRA for purchasing an
annuity at age 60, or invested in approved instruments under Section 54E.
4.The rate of return should be market determined and there should be no tax on it.
5.The limit on the tax-free annual contribution should be raised to Rs.1,20,000, less
contribution from an employer, if any. This would make the PPF equitable with PF (which
allows Rs.60,000 tax-free contribution from the employee and a matching tax-free
contribution from the employer. In fact, tax-free contribution from the employer could
even be higher). This would remove discrimination in tax-treatment of self-employed
persons vis-à-vis employed persons.
6.Branches of all commercial banks should be allowed to serve as PPF collection centres. A
comprehensive publicity programme should be initiated to enhance awareness regarding the
details and benefits of the revised scheme.
7.PPF should provide for an optional contribution for insurance against death and
permanent disability.
8.A Public Pension Scheme (PPS) should be initiated under the Public Provident Fund. 10%
of contributions to the PPF should be mandatorily earmarked for this new Public Pension
Scheme with a minimum contribution of Rs.500 a year. The first Rs.500 contribution to PPF
every year will go towards the mandatory Public Pension Scheme. Those desirous of
contributing higher percentages can contribute more. As in the case of the Employee
Pension Scheme (EPS), the vesting period should be 10 years. As recommended in Chapter 3,
breaks in contribution should be permissible and lump-sum contributions in case of
short-fall in the minimum contribution period, should be permitted. Those who are members
of any other pension scheme, on submission of documentary evidence, may be exempted. The
quantum of pension would be determined by the accumulation to the credit of the subscriber
at the time of retirement, death or permanent disability.
Annuities
1.Presently, the function of accumulating wealth and selling annuities are both bundled
into existing provident fund institutions.
2.Annuity provision will be more efficiently achieved by a market with competing annuity
providers registered with the Insurance Regulatory Authority. The Government should work
towards obtaining a thriving, competitive annuity market where private, public and foreign
firms compete in selling the cheapest annuities to India's citizens.
3.At age 60, the worker would accumulate a stock of wealth. On the principle of avoiding
double taxation, the part which is put into an annuity should be tax exempt. The
remainder, subject to the exemption limit, should be taxed at a 10% rate. The annual
income obtained from the annuity should be a part of taxable income.
National Senior Citizen's Fund
1.There is growing awareness and concern about the case of elderly persons in society. If
at all, the problem appears to worsen in future if timely measures are not taken in
present. The problem, geographically, is all pervasive and of large magnitude. This should
be a concern of all individuals, corporates, the private sector, as well as the
government. The government should take a lead in galvanising all these efforts. Towards
this end, it is proposed to set up a National Senior Citizen's Fund with a view to
encouraging, catalysing, and complimenting all private sector efforts for the betterment
of life of senior citizens in the country. The Fund can also be utilised for educating
individuals about various security schemes, conducting research into areas concerning
senior citizens and building infrastructure relevant to the social security industry.
2.The present contribution of 1.16% by the Government of India to the Employees Pension
Scheme should be channelled into this fund as initial corpus till this contribution
is gradually withdrawn. A part of the withdrawal tax on provident funds may also be
transferred to this fund annually.
3.The fund should be monitored and administered by a Board of Trustees appointed by the
Ministry of Social Justice and Empowerment.
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