Does India’s Private Sector Need Laws Governing Retirement?

Introduction

While individuals employed in government related jobs are statutorily provided with pensions and other retirement benefits, there exists no law governing the provision of such benefits to individuals in the private sector. This means that individuals in the twilight of their careers either have to invest in private retirement plans or approach old age with a great deal of uncertainty.

The above is especially troubling in India that has undergone a demographic shift both in terms of numbers and composition. One commonly cited statistic relates to how India has the largest number of people under thirty in the world. However, most people do not know that by 2050 an estimated 20% of our population will be above the age of 60, according to the State of World Population Report – 2019 published by the United Nations Population Fund.

India also possesses a demographic dividend which essentially means that the number of people joining the workforce each year is higher than those it needs to support. This demographic dividend however, is set to diminish over time as India’s fertility rate drops below its replacement rate essentially leading to a reduction in the population and consequently the working population. Another factor that influences this change in the composition of our demographic is the increase in life expectancy to 67.4 years for males and 70.2 years for females according to the National Health Profile 2019. India’s average life expectancy for a healthy 60-year old person to live in full health is 12.9 years, which is a marked increase from earlier decades.

National Policies

The Government has introduced several schemes aimed at addressing this issue, the National Pension Scheme is the flagship program amongst these. It was launched in January 2004 for Government employees exclusively but was later extended to all sectors in 2009. Any Indian citizen between the age of eighteen and sixty may join and membership is seeded with AADHAR with a minimum initial contribution of INR 500. The minimum yearly contribution stands at INR 6,000 for Tier-I accounts which do not allow withdrawal until the age of sixty whereas Tier-II accounts allow withdrawal throughout one’s lifetime.

The intention is for members to contribute regularly to a pension account during their working life and withdraw a portion of it as a lump sum with remaining funds going towards purchasing an annuity to secure a regular income after retirement. Several companies have begun offering the National Pension Scheme to their employees and view it as a key retirement benefit. To this end, on 10th December 2018 the government declared the entire corpus tax-free at maturity with deductions available for the annuity plans as well.

The fund is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA) created under Section-3 of the Pension Fund Regulatory and Development Authority Act, 2013.  The Act applies to pension schemes that are not regulated by other enactments however certain funds administered by other bodies are outside its scope, for example the Employee Provident Fund. The PFRDA is responsible for registering intermediaries and providing them with the certificate of registrations as well as regulating their operations.  Establishing a grievance redressal system and adjudicating disputes between intermediaries and subscribers as well as amongst intermediaries are other key functions.

Apart from this, there is the Indira Gandhi National Old Age Pension Scheme launched by the Ministry of Rural Development that targets those under sixty-five years, who are below the poverty line. It comes under the broader purview of the National Social Assistance Scheme. There is also the Atal Pension Yojana (APY) formerly known as NPS Lite which aims to cater to the needs of workers in lower-income brackets belonging primarily to the informal sector. With the Central Government being a co-contributor to the extent of 50% of the total contribution or INR 1,000 per annum only from Financial Year 2015-16 to 2019-20, this scheme is applicable only to individuals who joined between 1^st June 2015 and 31^st December 2015 provided they are not members of another statutory social security scheme and are not income tax payers.

While the schemes above are contributory pay-as-you-go schemes there is a need for fully funded schemes where workers’ contributions are saved, invested and benefits are paid out of the accumulated assets. There are also private policies that can be availed by individuals that offer greater choice and flexibility to an individual. Herein exists a policy conundrum that every government faces which is the trade-off between compelling individuals to save their income versus allowing them to select their preferred manner in which to save for their retirement.

The other factor with regards to retirement policies to be considered is the retirement age. The private sector has been left unregulated for fixing a retirement age according to the needs and conditions prevailing in particular types of employment. The Industrial Employment Standing Orders provides some guidance through the Model Standing Orders that provide a retirement age, but it is merely advisory. There have been multiple calls for both reduction as well as increase in retirement age across the public as well as private sector. This and the above policies with respect to schemes shall be analyzed in the subsequent section.

Recommendations

One of the major policy changes that can help working Indians save sufficiently for their retirement relates to bringing the Employee Provident Fund Organization (EPFO) under the purview of the PFRDA. As things stand, the EPFO is both a service provider as well as a regulator which creates a conflict of interest and large amounts of money is being utilized ineffectively towards enforcement. High contribution rates and lax rules lead to high rates of withdrawal resulting in low accumulated sums at the time of retirement. 

Thus, the next logical policy recommendation would be to have lower rates of contribution coupled with stricter rules relating to withdrawals. The rates of interest can be varied across income groups as well as age groups, ensuring that individuals refrain from withdrawing their savings hastily. This is especially true for the unorganized sector wherein individuals earn on a daily wage basis and thus require larger sums of their pay for day-to-day expenses.

The draft Code on Social Security contains provisions enabling both the Central and State Government to notify schemes for workers in the unorganized sector as well as those engaged in platform and gig work. One possible consideration herein is to bring these individuals under the umbrella of the EPFO at lower rates of contribution proportionate to their daily income.

With regards to the call for a uniform retirement age, there seems to be a reluctance on part of the Government to impose any limits on the private sector. It is appropriate because the needs of each sector are different as are the number of individuals entering a particular type of employment. However, the calls for an increase in retirement age in the private sector with claims of jobs being denied to younger individuals is one that is based in rhetoric as opposed to fact. Due to increase in access to healthcare and consequently life expectancy, individuals should be able to work as long as they desire to be productive members of society. The above claims are reflective of ageism and must not form part of any rational policy consideration.

What do you think about India’s private sector and its approach to retirement? Do we need more policies safeguarding the twilight years of our elderly?

Drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney. Simpliance makes no representations or warranties in relation to the information on this article.