Let workers port to the NPS as well

The government’s move to allow portability of social security benefits across formal and informal sectors is a good idea. It will enable the Employees’ Provident Fund Organisation (EPFO) to track and manage savings of account holders who shift from the formal to the informal sector. Now, every worker contributing to the EPF is assigned a Universal Account Number (UAN), and every time she switches her job, the EPFO allots a new member identification number that is linked to the UAN. That the proposed portability plan will benefit over 400 million workers is welcome. However, a better system is the seamless portability combined with superior returns offered by the National Pension System (NPS) that manages pensions of civil servants who joined on or after 2004, and of people who voluntarily save in the NPS.

Portability is automatic for every NPS subscriber, regardless of where she is employed. It also has the institutional framework to generate superior returns unlike the EPFO that has a poor record of fund management. So, it would make sense for workers to be given the choice to migrate to the NPS, as proposed in the 2015-16 budget: when they move from organised sector work to gig work or other informal sector jobs, to begin with. The EPFO’s ultraconservative investment pattern has failed to garner returns on workers’ savings on par with the NPS.

When more subscribers join, the pool of funds with the NPS will increase, giving fund managers greater flexibility to diversify deployment across asset classes. Sensibly, the pension regulator has increased the entry age for the NPS to 70 years from 65 years, and they can continue till 75 years. Of course, social security for the indigent would have to be State-funded, regardless of pension systems.