Pension Fund and the Unorganized Sector

Unorganized sector constitutes the segment of workforce whose activities or data is not regulated under any legal provision and there are no regular accounts maintained. Currently there are c. 363m unorganized sector workers in India (ca. 85% of the Indian labor force). This sector provides large scale employment and contributes to the national product significantly.

Major characteristics of the unorganized workers are:

- largely live below the poverty line

- suffer from low literacy levels

- are migrant in nature and

- are dispersed all over the country

In order to improve their quality of life it is imperative to cater to the following

- pension

- healthcare

- life insurance

- accidental unemployment insurance

- unemployment security and

- maternity needs

c. 44% of the unorganized sector avails of life insurance schemes via LIC / GLIC. Healthcare provisions are difficult and expensive to set up not to mention the many hurdles they present. However, setting up of dedicated pension fund will not only address the primary requirement of pension but can also be extended to cater to the last three requirements on the above list.

At present the old age support available to this sector in particular are:

- private savings

- family support

- selected central and state government schemes

- extending working life

Private savings are generally not available and where available are not adequate[1]. Family support is on the decline. Government schemes have limited scope in terms of adequacy and coverage[2]. Extending working life is not a viable option[3]. It is evident that there is a pressing need to develop old age security schemes for this sector.

Core functions of a Pension Fund

1. Reliable collection of contribution / taxes and other benefits
2. Correct payment of benefits
3. Incase of pre-retirement loans ensure timely repayment
4. Secure financial management and productive investments
5. Maintaining an effective communication network (data collection / record keeping)
6. Timely production of financial statements and reports

In order to establish a fund that can deliver on these core functions the following challenges need to be met

1. Assess the segment of unorganized workers[4] that has the capacity to make regular contributions. This analysis should contain data on the segment’s earning capacity, their spending and savings habits and what their ideal saving level and contribution be. From there it can be deducted how to generate pension contributions:
1. Via redirection of discretionary expenses
2. Via redirection of existing savings
3. Via future real increase in income

In addition, to incentivise contributions and help the establishment of a fund, corporate sponsors need to be sought to match workers’ contributions

2. A team of like minded skilled professionals needs to be assembled to
1. educate the target the audience and market the fund
2. manage the corpus to generate positive returns
3. administer demographic/earning changes in the sector
4. constantly work internally and externally to expand the quality and scope of services provided

3. An effective MIS system needs to be designed for record keeping and monitoring of
1. individual fund inflows and outflows
2. earnings of individual funds
3. loans and repayments
4. tax or subsidy collection
5. generation of timely reports

4. Accumulated balances should be invested in economically productive, growth enhancing investments[5]

5. Understanding legal and regulatory requirements, restrictions and proposed developments for such initiatives

6. Most importantly design and manage the financial corpus to deliver

1. Adequate coverage and level of protection
2. Affordable, profit making and sustainable service
3. Robust framework which can withstand economic shocks

Government of India recognizes the need to implement social security for the unorganized sector[6]. Thus it has embarked upon the highly ambitious pension plan reform scheme addressing the entire Indian labor force. In case of the unorganized sector in particular, this scheme plans to establish a voluntary contribution mechanism. There is a mention of outsourcing the administrative tasks to the private sector under a licensed and registered program. Government of India has sought help from the Asian Development Bank in this respect.

As a part of this “joint effort” a survey was conducted that generated the following results:

1. 2/3 of respondents have not given any thought to retirement planning
2. c. 20m have shown willingness to join a national pension fund based on
1. Financial capacity
2. Interest rate
3. Age between 30 – 50 years
3. most people (38% - 45%) mistrust private banks
4. most people trust nationalized banks (mistrust percentage 0% - 2%)

A commercial set-up is required to make this initiative productive and sustainable. While government support is crucial to the setting-up and longetivity of such a fund, it cannot be run by the state. Western governments are running into the red with their state run social security schemes. This business to be sustainable and profitable needs to be a private operation run by a team of like minded, experienced professionals dedicated to the success of this operation. India needs to bridge this gap at the earliest to ensure economic prosperity and inclusive growth.

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[1] Research conducted shows that Indians in general do not start early enough retirement

[2] There is financial limitation and existing schemes are either limited to certain states or sub-segment of unorganized workers

[3] By 2045 it is estimated that India will reach a declining share of working age population of the total population

[4] The most vulnerable segment of this sector is that of women (in particular widows). While not only do women earn less than men, they are 10 times less likely to own property. Thus it could make sense to have special funds created to cater to women and widows. However, to start with the initial corpus might not be significant enough and hence this has to come as an offshoot of a positive return generating fund.

[5] This could lead to scalability of the operation to microfinance, emergency loans against savings etc.

[6] Certain state governments also see this need and there exist a handful of schemes trying to address this in their own way. For e.g. there are 5 welfare funds set up for beedi workers created from the cess that is collected from the manufacturers, Maharsahtra government offers unemployment security etc. However all these efforts are disjoint