Monday, September 16, 2013

National Pension Scheme of India: Why The Banks Cannot Be Entrusted to Handle Peoples' Savings ?

If a government fails in its duty to safe guard some security to its old people who are no more in a position to earn a decent livelihood, such a government cannot be considered as a government for the people. In a democracy, if the government is not for the people, it simply ceases to be a democracy. 

Governments of olden days and some present day governments of nations, where civilization has not matured enough, could be made of people whose qualities are more or less matching with the selfish beasts. Here they come up to occupy the ruling positions by using instruments of terror and hold on to their positions for exploiting their country men. Such systems are bound to be dictatorial and there is no way that the people can expect some thing good from them.

Dictatorial governments composed of selfish and authoritarian people cannot be expected to  do any good to the common citizens. They use all kinds of tactics to control the citizens for getting benefits for them by extracting a portion of the toils of the citizens. That is understandable.

But when that happens in democracies, citizens have to do some introspection. After all, democracy is by the people, of the people and for the people !

Our democratic systems, of late, seem to run away from peoples' problems. They are made so complex that on one can get any worthwhile solutions from them. And who is making them complex? The irony is that the complexities are made by the elected representatives of the people themselves.

Suppose that you are entangled in a trap of strings. If you do not know how to come out of it by removing those looped up and knotted strings, you are likely to move here and there in panic making those strings to strangulate you to death. Our law makers seem to make the present day laws in this fashion. They seem to make laws that are going to strangulate them and others some time later. Every time when they try to untie a knot, the knot further tightens !

I have written this much as I watch the sorry state of affairs in this country where newer and newer laws make things more complicated.

Of late the government seems interested in making more and more autonomous controlling authorities in each an every field. It is the licensing raj in its latest avatar allowing the elected government to wash its hands if something worse happens. These autonomous controlling bodies would be responsible and not the government !

Latest in this series now is the National Pension Regulatory Authority. Its official name is Pension Fund Regulatory and Development Authority (PFRDA). With the passing of the bill this body has become a statutory one. It has now some teeth to bite ! The only thing to be seen is how it is going to bite and how such bites give the pensioners the protection !

But unfortunately, the government (the people who form the government and those drafting the rules) have not possibly kept the interest of the people who are the pensioners or  the would-be pensioners. People who have retired from active work should have some income to live comfortably and that income should reach them at their convenience on a regular basis.

Wise people who are smart enough in financial matters know well how to save for the difficult years and use their saved funds wisely.

But a good majority of people do not have such a wisdom or the financial discipline to manage their own funds. So, many people even with good accumulated funds could lose their savings making them in great financial difficulties.

Pension schemes come to help in such a situation.

Let us imagine a situation like this: Suppose that you have saved 5 % of your monthly income in a recurring deposit of the bank with for the entire period of your active working life of say, 35 years at an interest rate of say 8.5 % per annum. Suppose that this 5 % of your monthly income is Rs.1000. So for 35 years or 420 months you will save at the rate of Rs.1000 per month making your total contribution Rs.420000. But you would be surprised to know that your total savings would come to over Rs 24 Lakhs at the end of 35 years.

Now if this corpus fund of 24 lakhs is invested at the same interest rate, it would be sufficient to give you a monthly return (or pension) of Rs.17000 without any interruption for the rest of your life. That means your pension is 17 times the monthly contribution you have made. Moreover, your corpus fund of 24 lakhs remains intact and can be handed over to your legal heirs !

You can still do this without the government help. Only problem here is your own temptations which may tempt you to break your recurring deposit and use that money for some emergencies that you think as more important than your future pensions.

Now had the government simply made a small change in the existing laws that allowed the banks to create such schemes it would have been possible. Already the Public Provident Fund and such other schemes exist. But the PPF does not have an annuity payout system attached to it. All you have to do is take out your corpus (accumulated fund) and deposit in a bank as a fixed deposit with monthly interest payout option. Here too, the problem is control of your temptation to withdraw the corpus fund.

Now if the government allows the banks to prevent your temptation (of withdrawal of the already saved fund or allowing any withdrawal other than the monthly payment of interests except return of the corpus fund to the legal heirs at the time of death of the depositor) and make some deposit schemes similar to this mode, it amounts to a simplified pension scheme. Remember, the government can instruct the banks to deposit all these collected savings in government bonds so that the government gets thousands of crores of rupees for running its business as well.

The above scheme has a guarantee attached to its just as we have the guarantee on the fixed deposits of the banks. As long as the banks run, there is no problem of our funds that are invested. Normally, the banks work for generations, unless the governments make foolish policies to ruin them or they allow them to be managed with out proper checks and balances. 

Now it is again possible for the government to give some income tax benefits for such bank run pension deposit schemes because they are long duration deposits. Moreover it is possible for creating bank run pension deposit schemes for all people irrespective of the number of years that they have for active work and also allow people to contribute to their pension funds in irregular frequencies as well. The idea is to create an individuals pension corpus fund which will allow annuity payments on a monthly basis to them once they achieve their universal retirement age of say 60 years. The annuities will be payable to them during their life time and there after to their spouses and after that the entire corpus fund is returnable to their legal heirs.

But the government has now come up with the creation of an authority which will do the supervision and regulation of various pension funds to be created by financial companies. And these financial companies will do the investment of the funds mostly in the share markets which allow the funds to be drained out without anybody ever realizing it. If that happens the investors can simply curse their bad luck !

In this context, I remember the bad fortune I faced when some two decades ago, the same people in the present government allowed the banks to come up with mutual fund related savings schemes to be offered by government owned banks. I had invested some hard earned money a scheme called IndraPrakash floated by Indian Bank. I remember this bank sending me my account details, pretty impressively through out the entire 7 year investment period only to be told in the last that they do not have the money to make the repayments. The money was gone ! The government did nothing ! So many financial scams happened there after in this country with thousands of people losing their hard earned money and savings.

When the government is yet to move forward with such a scheme for the people who save for their hard times is unimaginable. It is simply anti people when pension funds are allowed to be run with no guarantees of returns. And that too when there are options for guaranteed returns !

Only when those in power feel authoritarian just as in autocracies such situations can happen. In true democracies, the prime concern of those elected representatives and those who are paid servants should be to serve the people and to work for the benefit of the people.

They should never think of making rules and laws which are anti people ! They also have a responsibility to alleviate the fears and apprehensions of the people ! 

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