Understanding Voluntary Pension Contributions by Informal Sector Workers

Guest post by Renuka Sane, Indian Statistical Institute, New Delhi

Financial inclusion is a priority area in the minds of policy makers in India. The larger focus of this debate has been on access to credit and insurance. Savings products, and long-term pension products have received relatively less attention. It is often assumed that poor people do not have the ability to save towards an illiquid product such as a pension plan. In recent years, several emerging economies including China, Dominican Republic, India, Indonesia, Vietnam, have begun experimenting with some form of Matched Defined Contribution (MDC) pension programs where the government provides an incentive by matching voluntary contributions made by plan members, in an effort to facilitate the build up of pension wealth by informal sector workers.

One instance of a MDC is the NPS-Swavalamban (NPS-S) scheme introduced by the Pension Fund Regulatory Development Authority (PFRDA) in India, in April 2010. In the NPS-S, those in the informal sector can invest amounts as low as Rs.100 to their individual accounts through a network of entities, called aggregators, licensed to undertake outreach, marketing and enrolment functions. To incentivise a minimum yearly contribution, the government agreed to gift Rs.1000 to those accounts that had managed to contribute Rs.1000 or more before the end of each financial year, for the first three years i.e. till March 2014. The scheme was recently extended to 2016-17. In the aggregate, about a million individuals signed up for the NPS-S. The true measure of success of a pension program such as the NPS-S is the persistence of contributions by its customers. The PFRDA has not released information about the aggregate persistence of the million customers who have signed up.

In a recently released research paper we analyse the data of one aggregator, the Kshetriya Gramin Financial Services (KGFS), operating in Tamil Nadu, Odisha and Uttarakhand. KGFS sells a variety of financial products, along with the NPS-S. The paper finds that among the KGFS customer base, around 12 percent, or 37569 individuals, chose to enrol in the NPS-S pensions program by March 2013. These customers are among the poorer people of the total customer base. They tend to have less accumulated wealth and are households in the lower income categories in the data. They are also among the less educated and tend to have poorer socio-economic indicators (such as access to cooking gas and private sanitation) compared to average customer in the sample.

Of those who participate, about 50 percent contributed Rs.1000 in at least one financial year between 2010 and 2013. The persistence has improved for customers who signed up in 2013, relative to those who signed up in 2012. Several customers choose to persist even if they do not contribute upto the Rs.1000 limit in one financial year. Customers who make one large valued transaction are more likely to accumulate the Rs.1000 in one year relative to those who make a small valued transaction. There is thus limited evidence of customers making multiple small valued transactions.

The NPS-S is a relatively young program, and more experience has to build up before we are able to measure the full impact of this scheme. The results in this paper, while localised to a single distributor, do provide evidence that low-income, informal sector workers are interested in illiquid pension accounts. It is also important to note that for several households, the NPS-S is their first foray into formal finance. The participation and persistence, limited as it may seem at present, could be the beginning of more systematic and regular contributions towards a pension account.

This analysis raises pertinent questions on whether the government should continue the subsidy and in what form. For example, the government may choose to dismantle the minimum threshold of Rs.1000 and provide an equal match upto a ceiling, enabling more individuals to benefit from the subsidy. Alternatively, the government may limit the scheme to households who can contribute the minimum amount (of Rs.1000) every year, at least till such time technology can drive down transactions costs and make even lower-valued transactions (i.e. less than the current Rs.100) viable. The costs and benefits of either option need to be considered as a successful implementation has tremendous implications for pension system design, financial intermediation and ultimately financial inclusion.