1. The New Pension Scheme (NPS) was introduced on 01 January 2004. Initially it is targetting only new entrants to central government service. Over a period of time, this scheme will be available (on a voluntary basis) to all other citizens of India including the over 300 million informal sector workers. This is a defined contribution (DC) pension system based on unique personal retirement accounts (PRAs) with centralized recordkeeping and administration. In this system, a member will accrete savings into his PRA while he is working and use his accumulations at retirement to procure a pension for the rest of his life. Members in this system will enjoy a variety of important benefits including portability across jobs and locations, rights and choices regarding fund managers and schemes, freedom to switch between service providers, low transactions costs, nationwide access, and protection against fraud and malpractice through a dedicated regulator (PFRDA).

2. The Government is presently working towards establishing appropriate regulatory and institutional capacity for this new pension system. In the next few months, and once the the regulatory and institutional capacity is in place, the focus of the policymakers will shift to achieving a significant level of participation by India's vast informal sector workforce.

Issues in extending coverage to informal sector workers

The NPS will target an extremely complex segment of the population - over 300 million workers located across 3.3 million square kilometers with diverse demographic profiles and differing attitudes towards finance and savings in a situation of low literacy, low financial literacy, potentially small contributions and a negligible impact of tax incentives. While the core principles and features of this new pension scheme should serve the unique needs and constraints of informal sector workers, several factors will influence this scheme's coverage and its ability to fulfill its core objective of providing adequate old age income security to this target audience.

1. Financial literacy:  This new pension system will impose a number of important questions and choices on informal sector workers. The IIEF Financial Literacy Survey1 of 2002 suggests that these questions and choices will appear daunting to relatively sophisticated urban audiences. It is very likely that they would be even more challenging in rural areas, where most of India's population is found. If informal sector workers use poor answers to these questions, they will obtain poor outcomes, and the new pension system will appear unattractive to them. Therefore, for this voluntary system to succeed, we need a tremendous input of human capital among households in terms of financial planning and the role of the formal pension system. We are faced by a gigantic gap on this front.

2. Transaction costs:  A majority of India's informal sector workforce is either self-employed or works with daily or weekly wages and faces unpredictable income flows. Most informal sector workers may therefore be able to accrete only modest, infrequent contributions which will be very sensitive to transaction costs. It is therefore essential to establish cost-efficient mechanisms tor collecting and transferring modest contributions into the system and for delivering pension benefits to members over many decades.

3. Consumption:  Importantly, participants in this new pension system may be prohibited from premature access to their retirement savings. As a result, individuals will need to use alternate mechanisms to fund and protect their present consumption and other non-retirement needs. Knowledge of and access to credit and insurance markets will improve the ability and willingness of this segment to save for retirement.

4. Demographics:  Attitudes towards financial savings, credit, risk and retirement planning will have a significant impact on the behavior of the target audience and their willingness to voluntarily participate in this new DC pension system. In India, people in different geographical locations are likely to exhibit remarkably differing attitudes towards financial and retirement savings. As a result, a one-size-fits-all approach may not work for all of India.

Workshop objectives

Informal sector welfare funds, employment-based associations, unions, self-help groups, NGOs and other such entities can serve as cost-efficient service providers for periodically collecting and 'pooling' modest contributions by individual workers and transmitting consolidated sums to specific products and PFMs on their behalf. Importantly, these institutional arrangements can also serve as benefit delivery channels when these workers retire. Some of these institutions (SEWA, Coir Workers Welfare Fund, Mumbai Taxi Men Association, etc. ) cover several hundred thousand workers each. These formal mechanisms can also be used for delivering knowledge and information, and for motivating and encouraging their members to join this system and should be harnessed into the pension reforms process.

This workshop aimed at fulfilling the following objectives:

1. to provide a platform to policymakers (DEA, PFRDA, etc.) to discuss the institutional arrangements, policy framework and the objectives of the new pension scheme with potential service providers and influence groups including NGOs, MFIs, SHGs;

2. to provide a platform to MFIs, NGOs, SHGs etc. to share their experience, interest, ability and concerns with delivering financial products, information and services to informal sector workers and to provide an insight to issues of transaction costs, geographical distribution, telecom and technology capacity, and the regulatory and legislative environment under which they work;

3. to provide a platform to MFIs, NGOs, SHGs etc. to share information on financial literacy, needs, constraints, savings capacity, as well as attitudes, behavior and actions on retirement and financial savings of their customers with policymakers;

4. to examine the specific roles that micro-finance institutions, self-help groups, NGOs, welfare funds and other worker associations can play in extending voluntary coverage of the NPS and in delivering financial knowledge and system specific information, as well as in pooling and transmitting modest contributions into the system; and

5. to discuss the policy and regulatory impediments and imperatives in harnessing the organized groups within the unorganized sector for delivering the NPS to this audience.

This workshop was an important step towards arming the Government and the PFRDA with the necessary information and insight to the needs and constraints of India's informal sector workforce and enable them to work more effectively

1. design appropriate products and benefits,

2. use low-cost service delivery and access channels,

3. design and deliver appropriate public education programs and information campaigns to sustain demand, and

4. build appropriate regulatory capacity backed by legislation