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Social Security is a big word that means different things to different people but at its core, it is protection against loss of income. Traditionally it meant a tax-payer funded government operated plan, but of late it has become synonymous with retirement and old age security. India is the only country in the world growing younger but the decline of the joint family means we have to find alternative and formal methods for old age security.

Indias technology industry is a young industry full of young people. As the technology industry moves from the hormonal exuberance of adolescence to the cruising speed of adulthood, it will be forced to make many lifestyle changes. Some of these will be around business models, some around how they do innovation, and much will be around HR practices.

The many HR practices that will be up for review will include the huge investment in training, the willingness to engage with employees that walk around with a resignation letter in their pocket and much else. But as the industry slows down, attrition does not and there has been talk about establishing a Technology Social Security Fund. I will argue that this is a mistake.

Getting a techie to think about his pension is like getting a politician to think about education reforms; it is just way beyond their horizon. India already has a framework for retirement benefits that is anchored to employer, ie, the Provident Fund Organization. The context for social security is also unique for IT firms because a) Employers consider social security as critical but non-core to employee engagement, b) Employers dislike spending dollops of top dollar on Social Security implementation, c) Most employers are loathe to bear investment risk on Social Security programs. Those that are willing to consider the possibility just got their lives complicated by the accounting and actuarial professions through the AS15(r), and d) IT Employees work in a high mobility environment where information and transactions are best done electronically.

Manish Sabharwal chairman, TeamLease Services	Amit Gopal VP, India Life Capital

Social Security Plans: A Close Look
Before we think about the future, we need to take an inventory of the current state of our social security plans in operation.

Provident Fund: Notwithstanding the perils of the guaranteed return scheme that M/s Bardhan & Comrades have converted it into, the PF has design positives (defined contributions, tax incentives, premature withdrawals linked to personal needs, etc). But it suffers from two issues: vintage regulation and implementation flaws. The regulation has not kept pace with changes in the needs of employees. This, to quote an instance, results in employees, who make complex choices in salary structure (cafeteria plans in compensation) having no choice or say in asset allocation of their provident fund accounts. The mandatory government bond continues to rule. Impact: An employee benefit that does not hedge inflation and delivers feeble terminal value. Implementation flaws can fill pages of this journal but the EPFOs poor delivery ensures employees do not have information and more often than not timely access to their funds on retirement. Impact: An employee benefit that is expensive to employers (4.58% of contribution) and does not provide hygiene factor services like quick transactions and access to information on the net. The Employee Pension Scheme suffers larger issues. It is actuarially unsound and grossly under-funded. Couple this with the transactional difficulties and one gets social security that employees jest is a black hole!

Gratuity: It is privatised and offers employers the benefits of choice (insurers and asset allocations) but suffers from being a defined benefit plan at a time when accounting standards and global experiences are biased toward defined contribution structures. Hence, corporate India has embraced capped gratuity (INR 3.5L) which negates the positives of it being a defined benefit. The decline of superannuation (voluntary defined contribution group pension plans) coincided with the fall in interest rates on home loans. FBT helped the fence sitters decide.

Source:www.azmythfinancial.com

Fitting the Bill: National Pension Scheme
So, what are the solutions to a sector where average employee age is twenty-four and Social Security will be a matter of concern in thirty years? Reform PF? Or is it the right time for the IT sector to ask for a Social Security Scheme for itself? Intuitively the answer is no because a) The benefits of economies of scale best accrue in pooled plans without industry bias, b) Plan design is a complex issue, but a social security structure with industry bias in membership will fail to insulate members and their pensions from economic cycles that the industry faces and c) International experience with industry plans is far from encouraging.

If somebody was asked to design the ideal social security plumbing of the IT sector, it would include a) Defined contributions; nobody wants to pay for expensive defined benefits, b) Employee choice in asset allocation; every man has his definitions of risk/return, c) Backpack pensions; anchoring pensions to employers is redundant in a high mobility environment and creates organizations like the EPFO whose role confusion (regulator or administrator) is its biggest enemy, d) Layered contribution structure with floors on annuitisation; facilitating real pensions instead of terminal lump sums.

The Technology industry is in luck; the new National Pension Scheme fits the bill. The NPS that the Govt is unveiling, in an early phase for civil servants, and the unorganized sector is a good mix of elements of the wish list. NPS is defined contribution structurally, requires at least 40% to be annuitized, permits voluntary contributions, encourages member choice in asset allocation and ensures that members bear investment risks. While pension gurus tout the NPS asset allocation flexibilities and multiple and competing fund managers as its USP, we believe the drivers towards the NPS would be its employee anchored structure, centralized record keeping plans, distribution mechanisms and low costs vis-a-vis other centralized social security plans. It is fatal to position the NPS as the end of all that ails Social Security. One sees significant challenges in employee expectation management even in the IT industry that is not unionised, and literacy levels of employees higher than most other. Social security has always been a fixed return product in India. Challenges are also likely in employee education and migratory costs. Public policy and regulation should smoothen this migration. However, in the long run, we believe an evolved NPS is one layer that will solve some problems of inadequate and inefficient social security to the IT industry.

In bad times, it is always tempting to do something about a problem. But pensions as social security are hardly issues to fool around with (The market cap of GM at $5 bn versus Toyotas $150 bn, in part, reflects goofy and irresponsible pension handling). Indias IT industry has much going for it and should always take the long view that has been its biggest strength. Rather than fool around with ideas and industry plan, the IT industry must get together and lobby the government to allow it to opt out of the existing PF and gratuity schemes and pay into the new NPS scheme.

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