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Tag Archives | APY

Bringing efficiency to social welfare

The linking of the Atal Pension Yojna to other welfare schemes is a positive step towards greater operational efficacy

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In order to be successful, social schemes in India need more efficient design structures and easier and more effective implementation procedures. The first step towards achieving this would be to streamline the existing structure of the implementing agencies as this would reduce the economic cost incurred. Thankfully, the current government has already realised the benefits of optimising implementation and has begun to link various schemes to each other. The latest pension scheme in India, the Atal Pension Yojana (APY), will utilise the organisation architecture of the National Pension Scheme (NPS) launched in 2004 and will also be using the accounts created under the Pradhan Mantri Jan-Dhan Yojana (PMJDY) to broaden its provision.

Linking with the NPS

The biggest advantage of linking the APY to the NPS is the number of benefits availed by utilising the NPS’s established structure. For example, the Union Budget 2014-15 made the NPS more lucrative by granting an extra tax deduction for investments in the NPS. The Finance Minister announced that a separate tax deduction of Rs 50,000 will be allowed over and above the limit of Rs 1.5 lakh set by Section 80C of the Income Tax Act, 1961. This was done to increase the demand for the NPS.

Another bonus to the APY is that it can piggyback on the subscriber base already accumulated by the NPS. In a period of 6 years, the NPS has managed to accumulate 38 lakh subscribers. However, this number could still increase; 38 lakh subscribers still only form a small percentage of the total population. One of the reasons for this is the low commission rate for NPS agents. They consequently do not have sufficient incentive to promote the scheme and the net result is that people are comparatively unaware about the scheme. Keeping this in mind, the Finance Ministry has announced that pension schemes for the unorganised sector would be linked to the PMJDY .

Linking to the PMJDY

The PMJDY is a scheme to improve financial inclusiveness amongst low income groups and was launched in August, 2014 in two phases. The first phase will end on August 14, 2015 and its target is to provide bank accounts to all families that don’t already have one. The aim of the second phase will be to provide micro finance and unorganised sector pension schemes though ‘business correspondents’. The PMJDY utilises the Aadhar framework as a delivery mechanism. The Aadhaar is the ID number issued by the Unique Identification Authority of India. It was introduced with the primary objective of providing identification to Indian citizens who did not have government issued identification documents. As of January, 2015, the PMJDY scheme had managed to open 115 million accounts. However, only 28% of these were active while the rest had zero balance.

The Finance Ministry has been trying to activate these zero balance accounts by linking them to various Direct Benefit Transfers such as the APY. This approach is very similar to the various methods used by the government to incentivise Aadhaar cards. One such method was to use Aadhaar to create the subscriber database of beneficiaries for schemes such as Mahatma Gandhi National Rural Employment Guarantee. Another was to make the Aadhaar sufficient proof for “Date of Birth” to obtain a Permanent Account Number (PAN card), an identification for Indian citizens who pay income tax. Linking PMJDY accounts to such schemes would not only increase financial inclusiveness in the country but also help ingrain a habit of long term saving among individuals.

Such a move would benefit the APY too as it would allow the scheme to access the Aadhar database to help identify beneficiaries.  Despite having a voluntary enrollment process, Aadhar has managed to cover 80.46 crore people. As per an affidavit by the government, “16.25 crore bank accounts have been linked to it enabling the public to get direct benefit transfer (DBT), over 37 crore LPG subsidy transfer transactions amounting to a total of over Rs. 11,500 crore and a total of Rs. 61.04 lakh payment transactions have been done through DBT across the country for 34 schemes amounting to Rs. 681.14 crore.”  The 16.25 crore accounts created include those bank accounts created under the PMJDY.

Outcomes

This step taken to link various authorities will help in efficiently and effectively delivering social welfare schemes to Indian citizens. Reducing the level of compartmentalisation across the various social welfare schemes would streamline the process for both government and citizens. Clustering various social schemes together will help in directing the energies of the various governments authorities involved and will reduce the transaction costs faced by subscribers who have to deal with cumbersome processes in multiple government offices to avail of these schemes. For instance, the potential of Aadhar as a common database for all social benefit schemes would make identification of beneficiaries much easier as well as reduce the amount of paper work and documentation necessary for beneficiaries to avail these benefits.

However, there is still a vast scope for improving the operational efficiency of social welfare schemes such as the APY. A greater use of innovative processes and technologies will probably be the next major step, though awareness and finances may initially be a burden in achieving this. Most government authorities have already using mobile phones as a platform to interact with subscribers to their schemes. The next innovation would be to use electronic payments via mobiles for directing cash transfers. Vodafone has tried to bring mobile cash transfer services to India through M-Pesa but a lack of digital and financial education has restricted its growth in India. There may still be a long way to go, but the linking of schemes is certainly a positive first step.

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher

Image credits: Ekta Parishad

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A primer on Atal Pension Yojana

Atal Pension Yojana is the latest example of schemes by the government of India to solve for the problem of old age pension in an increasingly ageing society — Devika Kher and Varun Ramachandra

Atal Pension Yojana (APY), a voluntary co-contributory pension initiative aimed at providing access to pension for individuals from across the income groups, was announced in the Union Budget 2015.

The scheme comes at an opportune time because the need for an economically viable and inclusive system to support an ageing population is rising. As per the UNFPA and Help Age India report, the elderly population (above 60 years) was 10 crore in 2012, which was 8% of India’s total population. The report claimed that the elderly population would increase by around 11% by 2050. The UN’s World Population Ageing 2013 report shows that India will have the second largest population of people above the age group of 80 with 37 million people by 2050.

In 2004, The National Pension Scheme(NPS) was introduced with the express intention of providing retirement benefits to all citizens. The initial launch was limited to new government employees (except armed forces), but this changed in 2009 when citizens on a voluntary basis could enroll in the scheme.  In 2010, “The Swavalamban Yojana” was set up with the objective of providing retirement benefits for the informal sector. Under this scheme, the government provided matching contribution worth ₹1000 for an NPS member making contributions between  ₹1,000 and ₹1,200 p.a. The payout, consisting of a lump sum payment and annuities, was scheduled to happen after the subscriber reached the age of 60.

In the recent budget, the NDA government has subsumed the Swavalamban Yojana under Atal Pension Yojana. All contributors under Swavalamban would automatically be transferred to APY unless they chose to opt out.

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APY Characteristics:

Unlike Swavalamban, benefits under APY is guaranteed by the government in terms of fixed pension. The monthly contribution needed for the APY is pre-defined along with the monthly pension and the corpus amount that would be received at the end of 60 years. As per the scheme, to get a corpus between ₹1.7 Lakh and ₹8.5 Lakhs, the subscriber has to contribute between ₹42 and ₹210 on a monthly basis, that is if (s)he joins at the age of 18 years. For the same range of monthly contribution and the year of joining, the scheme ensures a monthly pension varying between ₹1000 to ₹5000. For instance, an individual would have to contribute ₹210 from the age of 18 years to 60 years in order to receive a corpus of ₹8.5 Lakhs and a monthly pension of ₹5000.

The range for the monthly contribution has been set in a manner that allows the subscriber to opt for the scheme based on income. For instance, a subscriber from a lower income group unable to spend ₹1,454 for 20 years to get the monthly returns of ₹5,000 can opt for the scheme which is compatible to his or her income. However, the ones who can afford a higher monthly contribution can opt for a scheme that guarantees a higher monthly pension.

An additional feature of APY is that the contributions can be made by individuals only between ages 18-40 years. The cost of exit is high as exit before 60 is allowed only in the case of exceptional circumstances such as death of the beneficiary or if (s)he suffers from a terminal disease. This allows for accumulation of funds for longer periods, resulting in higher returns thanks to compounding. The returns are further augmented by the government, which will contribute ₹1,000 or 50% of the contribution (whichever is less) for 5 years annually.

The organisational structure for APY will be regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA consists of a three tier management system for all its pension schemes. It includes

  • The Point of Presence (PoPs) –  referring to banks that act as subscriber interface
  • The Pension Fund Managers (PFMs) – The asset managers responsible for offering investment options and making optimal decisions on behalf of the subscribers wherever  necessary
  • The Central Record Keeping Agencies (CRA) – Are communication channels that maintain the links between the PoP and PFM. The CRA is also tasked with maintaining the contribution records

The Pension fund managers are SBI pension funds, UTI retirement solutions and LIC pension fund, each managing a specific proportion of contributions. The Central government employees’ fund is invested in the proportion of up to 55% in Government Securities, up to 40% in Debt Securities and up to 5% in Money Market Instruments.

Scheme’s reach

NPS uses the existing network of banks and post offices to penetrate the rural areas. The postal and bank savings accounts provide the necessary platform for the government to transact with its subscribers.

A bank account is therefore a necessary prerequisite to join APY. The problem of identity proof that existed for long in rural India has been assuaged by the introduction of Aadhar – the unique identification project instituted by the Government of India to identify citizens.  SMS alerts are used to communicate the necessary details with the subscribers.

The challenge with most pension schemes is the continuity of contributions and in order to incentivise the subscribers to contribute regularly, a nominal ‘fine’(ranging from ₹1 to ₹10) is charged for any delay in contribution—interestingly, the amount collected as a ‘fine’ is added into the final accumulated balance of the subscriber.

The two key aspects that can potentially help reach a wide subscriber base for APY are the use of well infiltrated existing structure of NPS and the guarantee provided by government. It remains to be seen how efficiently the government can link the scheme with the Pradhan Mantri Jan-DhanYojana(a scheme to improve financial inclusion) to attain higher levels of efficiency

Conclusion

APY is the latest example of schemes by the government of India to solve for the problem of old age pension in an increasingly ageing society. That said, it will be interesting to see how the government will address the challenges of implementation of the scheme and inclusion of citizens with irregular streams of income.

Devika Kher is a research associate and the head of admin at The Takshashila Institution. She tweets @devikakher.

Varun Ramachandra is a policy analyst at The Takshashila Institution and tweets @_quale.

Image credits: Simon Cunningham

 

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