People's Democracy

THE PENSION ROULETTE

N M Sundaram

OF late there is much talk of pension reforms. This is being taken up as part of the financial sector reforms. The contemplated reforms in this sensitive sector pertain to privatisation and induction of more private players, including foreign ones. There has however been at best perfunctory study of the efficacy of these reforms. The elementary aspect of assessment of these reforms in the financial sector as a whole should basically relate to whether through these reforms more of savings has materialised in the economy and more of investment – capital formation – particularly in crucial areas of development like infrastructure. This is what Rakesh Mohan Committee on infrastructure also emphasised. While this is normally required in all countries, in a developing country like India, it is of greater relevance. In reality there has been very little in-depth study of these aspects. Nevertheless, success is being flaunted on the basis of expansion of banking activities such as fee based services and extension of credit to better off sections of the people for purchase of white goods. Whatever linear growth has taken place in the financial sector is relatable to the uneven and lopsided growth of the economy as a whole. We may however, discuss these questions another time, the focus of this article being pension reforms.

PENSION AS A SOCIAL SECURITY BENEFIT

While industry and commerce are exercising pressures on the government in this direction, the latter itself is seen making sympathetic noises. Particularly after the advent of the UPA government, its finance minister seems to be more than willing to open up the pension sector to private multinational interests. The finance minister has been saying that an independent pension regulatory authority would be created and pension funds would be encouraged to set up shop with even 100 per cent foreign equity.

In India, there is very little awareness and therefore spread of pension. Hitherto, it was considered the natural domain of life insurance industry which after all had the expertise to deal with long term risks, funds and investments. But due partly to inadequate marketing and mostly due to lack of awareness of its importance, pension schemes were not very popular excepting for what was sold as annuities by insurance companies – by LIC after nationalisation of insurance. The government did not recognise its role as a much needed social security and its potentiality as a stable and long term provider of resources for development.

There was inadequate appreciation on the part of workers and their trade unions too of the importance of pension as a valuable provider of social security. To the extent importance was given to the likes of provident fund, pension was not given its due importance. The relative narrow spread of unionisation too was responsible.

In India at present, pension benefits are in vogue in very few sectors. Apart from the state and central governments, pension as related to terminal wage is in vogue only in public sector insurance and banking. In the government sector, the method of paying pension benefits has permitted the government to argue that pension as paid to its employees is met from the taxpayers’ money and this has led to intractable fiscal deficits. There has been no attempt to explain why a fund was not created, particularly when the change over was made from contributory provident fund. In insurance and banks these are funded. In insurance sector pension is paid through purchase of annuities. Some other benefits in vogue that go by the name and content of pension are through individuals and groups purchasing pension plans as are offered in the market.

It is however, important for all concerned the government, employers and the workers, to realise that pension is an important social security benefit that enables generation of stable long term resources for development while providing the much needed social security to individuals and families in the most vulnerable period of their lives. The benefit of pension therefore needs to be extended to all sections of the people and not only those in the organised sector.

It should also be realised that pension benefit has to be kept transparent and secure and beyond the pale of accounting and speculative mischief. Being a long term proposition, the pension fund must be kept invested and managed in a scientific way in order that the liabilities are met fully and in proper time.

PENSION REFORMS

Pension reforms are new in the Indian context. These have been part of the process of financial sector liberalisation that has been ushered in. And this in turn is an integral and important part of neoliberal globalisation that is being pushed through without regard to the economic, political and social consequences.

Pension reforms as contemplated, involve setting up a separate Pension Fund Regulatory and Development Authority (PFRDA) in the first instance. The government does not even bother to explain why there should be a separate authority and why the Insurance Regulatory and Development Authority (IRDA) cannot be entrusted with the responsibility. After all pension involved management of long term risks and funds and was always an integral part of the life insurance industry. The present finance minister Chidambaram himself emphasised this aspect when he unsuccessfully attempted a truncated insurance reform confined to pension and medical insurance and introduced the Insurance Regulatory Authority (IRA) Bill during his first term as the finance minister. This sudden change in perception makes one wonder if there are ulterior motives behind the separation of pension from life insurance.

While in insurance, Indian private players have been permitted entry along with foreign partners with an equity limited to 26 per cent, separation of pension would enable higher foreign equity – even 100 per cent – in regard to pension funds. This is what foreign financial interests want; they are not satisfied with just 26 per cent equity participation. That is why the government is willing to allow higher FDI up to 49 per cent - to start with of course – in insurance. The government announced this proposal of hike in equity without any consideration of the consequences, in its first budget exercise. Such has been the pressure exerted by foreign financial interests that the government lost no time in yielding to this demand despite knowing that it was dependent on the left parties for survival and the latter were stoutly opposed to it.

Separation of pension from insurance and setting up a separate regulatory authority is a cunning ruse to straight away feed the avarice of foreign players to enter the Indian market with 100 per cent equity. It is a shame that a national government should display itself to be subservient to imperialist capital’s demands without regard to consequences to the Indian pension clientele and the economy as a whole.

Pension is an important component of social security. As already emphasised, it is also an effective method for mobilising long term resources for development. There has in fact been much rhetoric on this: both about the need to introduce an important social welfare benefit as pension and about the need to enhance long term resources for development of the economy particularly in the infrastructural sector. Pension as in the case of life insurance, provides an admirable instrument for making this possible. What is required is devising attractive products as well as aggressive marketing. What is more, there has to be sound ways of conserving and enhancing the fund in order that it is capable of meeting liabilities in the long run as well as providing much needed long term and stable capital. This is where the private players, particularly the foreign ones have miserably failed and present a very dubious picture.

In the USA, there are different types of pension schemes in vogue under which there are public as well as private pension funds. The public funds are managed by the state authorities through their controllers (regulators). There are governing legislations too such as Employment Retirement Income Security Act as in the State of Illinois in the US. There are similar legislations in other states as well. These funds are being managed either directly or through specified agencies. For example in California, the fund management is done through California Public Employee Retirement System popularly known as Calpers. While in some other states all public employees including teachers, police, firefighters, sanitation workers and the like are covered. There are also state sponsored statutorily provided schemes as part of the social contract between the state and the people. These apart, there are 401(k) and such other schemes in the US that constitute a departure from the concept of a guaranteed benefit and linked the retirement benefit wholly to the stock market. As for private pension funds, some are managed by the companies themselves and are confined to their employees. There are others types of schemes extended by mostly through insurance companies and private pension funds.

EROSION OF PENSION BENEFITS

Public as well as private pension funds have seen great erosion in the process of implementation of neoliberal economic policies. Often workers as well as executives who are subscribers have suffered colossal losses so much so that in certain cases no pension became payable. The culprits are not just private interests but public authorities as well. More than a decade ago, the Fortune magazine in its issue dated January 13,1992, published an exposure under the caption: ‘The Great Pension Robbery’. The article by Alan Deutschman commenced with the caution: “States and cities are plundering employee pension funds to ease their budget crises. Taxpayers may be struck if the plans can’t meet their future obligations”. The article referred to the methods adopted by the government to divert pension funds for meeting budget deficits. The BBC too in its feature ‘folio’ went a step further and called it a fraud. BBCs however exclusively related to private pension funds.

SCIENTIFICALLY STRUCTURED PENSION SCHEMES

The two exposures, Fortune’s article and BBC’s folio, raised certain fundamental questions: To whom does the pension fund really belong? The answer is unambiguously clear: It belongs to the subscribers – to the beneficiaries and to none else. The pension fund assets represent deferred employee compensation and so constitutes their personal property that should be tampered with. The fund managers - be they state bodies or private entities are trustees on behalf of the beneficiaries they must not be allowed to do what is clearly injurious to the interests of these beneficiaries most of whom are ordinary workers who have placed their life time savings in trust hoping that they would be enabled to take care of themselves and their families during the post retirement period.

The pension schemes must be scientifically structured taking into account all relevant factors. A pension scheme is devised with reference to historical data such as life expectancy, inflation rates and so on. On the basis of this data, actuaries have to determine how much fund a pension scheme would need in the years from now in order to be able to pay the promised pension to the future retirees. This involves complex assessments of a whole lot of assumptions over long periods.

There are many ways indeed by which the pension beneficiaries have been deprived of their dues after retirement either in part or in full. This could happen in a variety of ways.

One reason for pension defaults could be violent fluctuations in interest rates. This could be set right by making scientific assessment of the possibilities for the future. In practice however, this is becoming more and more intractable in the context of frequent economic gyrations experienced by countries. To what extent pension funds, huge as they are, themselves contribute to such economic upheavals when applied speculatively, is a moot question. Interest rates are also frequently subject to political whims.

A wrong assumption on interest rate or an unexpected rise in interest rate than assumed might prompt an employer to contribute less than normal in order to show economy in operation. Such under-funding because of increase in interest rate is not uncommon. This amounts to inflating profits of the enterprise too, looked at in a different context. There are employers who show this as part of income as well in order to show an inflated figure.

The second malady is employing the funds in speculative investments. When in 1996, Ronald Reagan, in the course of his presidential debate with the incumbent president Gerald Ford, advocated that funds in social security should be ploughed into the stock market, it came in for ridicule by knowledgeable people. People who understood the mechanism of managing long term funds, particularly social security, felt abhorred. Even Wall Street Journal the mouthpiece of the American Stock Market, in its issue dated February 11, 1976 carried the response of Gerald Ford in its headline reading: “Ford Derides Reagan’s Idea of Investing Social Security Funds in the Stock Market”. Gerald Ford making fun of his opponent’s suggestion said: “I am not sure a lot of people would think it was a very good place to invest funds over the longer period of time”. He did not have to convince many people why the idea of Reagan was outlandish, if not stupid.

MYTH THAT STOCKS CREATE WEALTH

It was common experience that stocks were simply too risky. In 1996 itself, when Reagan made the proposal, the stock index adjusted to inflation would show the stock market position in a worse light. The value in real terms of an average stock had declined by as much as two thirds. Even if a longer period of half a century was reckoned there was only marginal gain of 3.5 per cent per annum interspersed with destructive falls in a way as to diminish or at least shake the faith of average American investor in the stock market. Still it was sweet to the ears of financial markets. No wonder Reagan won and Ford lost.  Such is the sweep and power of the markets.

Reaganomics in operation made a fund that is supposed to be a social security after retirement to be used in the casino world of stocks and derivatives. This happened in Reagan’s America and is continuing to happen on a large scale in different countries. By 1979 pension funds kept as much as 90 per cent of their investments away from stocks. Whatever faith Americans had on stocks had eroded. So much so, Business Week in its issue dated August 13, 1979, even wrote an article entitled: “Death of Equities”. It was not until the pro-market neoliberal economic policies were ushered in – Reaganomics – the stock markets revived with funds being poured into stocks as if there was no tomorrow. As Roger Lowenstein wrote in his book: The Great Bubble and Its Undoing - Origins of the Crash: “America had become more sensitive to markets, more ruled by markets, than any country on earth”. And, in the exuberance of so much paper wealth being created all rationalities were lost. So was the case with pension funds that got funneled hugely into the churning depths of an unsparing and fickle stock market.

So much so, when the stock market is on the upswing there is euphoria of artificially over-valued assets prompting the employer to reduce funding. And, when the stocks are on a downward trajectory, the assets’ value gets eroded and the fund shows inadequate funding prompting the employer to increase contribution from subscribers or reducing the benefits. Both have happened. This can happen by assumptions too at the time of framing the scheme or thereafter. This may be better illustrated: If the assumed capital appreciation is one percentage point over 30 years, the employer can cut current contributions to the fund by 20 per cent.

There is this practice too of showing the contribution as having been made but in actuality holding it back, in order to manage cash flow. This is known to be done over periods long and short, without the auditors or the regulators noticing it, or simply ignoring it.

There is also this incredible practice of showing pension contributions as part of income to dress up profit and to manipulate stock price upwards.

The most treacherous of all is making the scheme complex and unintelligible to the employee/subscriber. Often the stringent and exclusion clauses are put in small print in the prospectus making it hard to read let alone understanding it.

These aberrations are not altogether divorced from the corrupting influence of the stock market euphoria. A renowned writer said that people are the most credulous when they are most happy. How true! The upswing in the stock market made people forget the downswing earlier when they lost huge chunk of their wealth and subjected them to misery and privation. It is akin to a gambler’s logic: ‘The next will certainly be a winning cycle’. Such irrationality goes on. It is more correct to call it greed rather than mere irrationality. This was the culture of greed that spawned the theory that market was supreme, even sovereign. It is this that gave place to CEO excesses and corporate shenanigans unknown in the history of normative capitalist greed. Enron was just one example (to be followed by Tyco, WorldCom and many others), albeit a very glaring and comprehensive one when everyone lost: the customers, the employees, the executives, the shareholders. In fact the system itself lost and got exposed: its humbug of superior auditing, regulatory law, competence of the governing board, so called concept of shareholders’ democracy, the entire framework.

We have generally described the long term nature of pension, its value and content as a social security, the underlying pitfalls in choosing as well as managing pension funds etc. We have also seen how it is wrong to invest such funds of long term nature in the stock market and still how this has become the normal practice despite bitter experiences, how private employers as well as the government tend to misuse the funds for their own purposes and how the subscribers have been grossly deprived and deceived. There is much more to be said and exposed even as the roulette wheel spins on. With the roulette wheel – a game of chance – there could be occasional gains. But the revolving pension roulette wheel being manipulated by the greed of the managers, indifference of the regulators, uncertainties of the stock markets and the credulity of the subscribers, cannot produce even this occasional success.

Before we proceed to examine what more harm has been experienced on the pension front after the advent of the so called reforms, we must emphasise one home truth. The stock markets rule supreme no doubt despite the rollercoaster experience with it. They have become so dominant that since the day when Gerald Ford, obviously joined by most, ridiculed the idea of investing social security/pension funds in the stock market, these funds are increasingly getting invested in stocks despite crushingly bitter experiences. Call it mania or madness the stock markets sway the destinies of individuals as of governments and nations. This must be exposed – this madness must be fought and remedied.

In the meantime let us look at this obvious absurdity – this belief that stock market would enrich all players! The stocks in the market are collectively owned already. Is it not therefore a dubious notion that everyone who invests in it can profit? Shuffle some stocks from A to B – say from existing stock holders to retirees. Some would end up gainers and some losers. Then how come the notion that all could gain? It is just absurd. It is equally absurd, nay stupid to believe that the society – the country – as a whole would gain and end up richer.