With the Union Cabinet approving the Pension Fund Regulatory Development Authority (PFRDA), pensions in India have come a long way. What seemed like a beautiful dream in 1999, when the Oasis Committee first submitted its report, is poised to come true today.
The important aspect of this journey has been that two successive governments have looked at pension sector reform issues from first principles, and both have continued to go ahead with the proposed reform, thus ensuring that the process has a broad-based consensus. But before we herald the coming of pension reform in India, we might do our dream of a nationwide, portable, individual account-defined contribution system some good by internalising the fact that the devil very much lies in the details.
The first and foremost challenge is the staffing and building of PFRDA. The PFRDA is unique among regulators, as it will have to create the market it will regulate. It will have to set up a central record-keeping agency, contract out pension fund managers and bring pensions to a population that has hitherto been out of the purview of any pension system. No other regulator in India has faced such a challenge.
The demands on the PFRDA call upon a unique organisational structure that reflect the needs of the regulator. For example, the PFRDA could consider offering market-linked salaries to hire the best people from the labour market. Or envisage a contract-based structure where the best people are hired to do specific jobs. India has good precedents of how not to set up regulators, and the PFRDA is well-placed to mark the beginning of a class that meets world standards.
The new pension system is currently applicable to new recruits of the central government starting January 2004. Many state governments have announced their intention to join it. Very soon, several thousand people will be a part of it. The government has an interim arrangement to deal with operational issues of contributions to the pension accounts of employees, till such time as the CRA and the pension fund managers are in place. The government needs to ensure there are no loopholes in this procedure and that once the CRA is set up, the migration to the CRA is seamless.
So we have an interim arrangement in place, ready to migrate to the CRA. What we now need is successful contracting and implementation of the CRA. The central record-keeping agency is the heart of the whole system. India has seen success stories with complex IT implementations in the last decade- we have a railway reservation system, a National Stock Exchange, a depository, such as the NSDL, and more recently the Tax Administration Network (TIN). India has also seen one disaster with IT implementation- the payment system talked about by the RBI since 1992 is still not a reality today. The PFRDA has a lot to learn from such precedents.
What sets the success stories apart are good management teams that have dared to move away from the draconian ways of contracting and implementation. Once the contracting is done, the PFRDA needs to ensure constant communication with the service provider on implementation issues and ensure dedicated personnel solely to the task of the setting up of the CRA.
The challenges before the PFRDA are many. First, it needs to get itself up and running. Second, it needs to ensure that the interim arrangement functions well and third, it needs to ensure that contracting and implementation of the CRA is well in place. More importantly, the PFRDA has to ensure that the institutional framework is set up in good time. It is crucial that this process is expedited so that we do not keep out of the system the very people we set out to reach.
The writer is a research associate with Invest India Economic Foundation, Delhi. These are her personal views