The Pension Fund Regulatory and Development Authority proposes to launch pension funds for all Indian citizens by April 1, 2009. It is essential that this be done with top priority as it can provide meaningful and effective old-age security to workers in the unorganised sector. The existing pension schemes in India focus on the “organised sector”. There is a pension scheme for civil servants, which is currently being overhauled into a modern scheme with smooth IT systems and competing fund managers. There is the EPFO, which is mandatory for the organised sector, which may be ridden with problems. While there is a small scheme run by the EPFO for unorganised workers, its coverage is very limited. Effectively, 93 per cent of the work force which is employed in the organised sector does not have access to a pension scheme.

How can India offer old-age security to the poor unorganised workers across the country? At present, 50 odd insurance companies and mutual funds offer over 700 financial products. However, these products have only been accepted by less than one per cent of the population which participates in them. This is due to the high cost of the schemes and their complexity. A worker who can put in Rs 10 per day finds no place for herself in the scheme.

It should also be clear that the government does not, and will not, have the fiscal capacity to fund a population-wide defined benefit scheme paid out of taxpayer money. A defined contribution scheme must be designed which is suitable for workers with little education, near zero financial knowledge, and geographical mobility. One way to achieve this is what is being proposed — that is, to expand the new civil servants pension scheme to the unorganised sector. This has a nice kind of incentive compatibility: if civil servants build a scheme for themselves, they have an incentive to make it work. It is however important that the PFRDA ensure that the new civil servants’ pensions scheme is fully accessible and friendly to the poorest of the poor and uneducated in the country.