Assessing the pension scheme for unorganized sector workers
By Gayatri Sahgal , 10 Apr 2010

Social protection programmes have in the past (to a large extent) excluded the most vulnerable section of the Indian workforce; the unorganized sector. On 26th September the government sought to overturn this long-standing tradition by extending pension benefits to 85% of the workers who find employment in this sector. The scheme titled  ‘Swavalamban’(meaning self reliance), covers unorganized sector workers between the ages of 18-55 years. This implies that any worker between the ages of 18-55 years can become a subscriber and is liable for receiving  pension at the age of 60 years.

The Swavalamban scheme is essentially a contributory scheme which provides for a minimum monthly contribution of Rs 100 and a maximum annual contribution of Rs 12,000. The Union government on its part shall contribute Rs 1000 per year. The scheme shall be administered by the Pension Fund Regulatory and Development Authority (PFRD), which shall oversee the overall management, while the deposits shall be managed by private fund managers. The private fund managers shall be able to invest only 15% of the total funds in equity markets while the rest shall be invested in high quality fixed income securities such as government bonds. Upon attaining 60 years of age, subscribers will be able to withdraw 60% of their contribution, while the balance 40% will be given as monthly annuity by LIC (Life Insurance Corporation of India).

 Sounds reasonable? Cynics might be tempted to ask—where is the glitch? While it may be too early to point out any glitches, some challenges and issues come to mind.

  • The scheme treats all workers as a homogenous group: It defines unorganized workers as those who are either not currently employed by the central/ state government or by any other autonomous or public sector undertaking of central government and those who are currently not covered by any of the existing social security schemes. This definition while inclusive spans all categories of workers from self employed professionals to Rickshaw Pullers and Construction Workers. The scheme does not appear to be tailored to consider the stratified nature of the conditions of work. Which begs the question of whether the scheme can be appropriate for such a large and heterogeneous group?
  • It assumes that workers will have the ability to save: the emphasis on regular monthly contribution assumes that workers will have the ability to contribute on a regular basis. This represents an important challenge given that one of the distinguishing features of the unorganized sector is irregularity of work which often impairs the ability to save. According to a report by NCEAR, the bottom half of the population by income distribution are responsible for only 2% of the savings in India (2000). Moreover savings by the poor are also mostly of a short term nature and are stored in instruments and assets having high liquidity. It remains to be seen whether the scheme will be able successful in promoting thrift and encouraging a shift from long term to short term savings.
  • Concerns of accessibility: For workers to gain maximum benefit, it is necessary that the scheme be structured in ways such that the cost of participation is low, i.e. the scheme should be accessible to workers both geographically and in terms of simplicity of procedures.  These are issues which are particularly relevant to workers employed in this sector, given their low levels of education and relative isolation from formal institutions and processes (especially financial institutions) (NCEUS Report, 2007). How the government plans to address the gaps in accessibility remains to be seen. 

Gayatri Sahgal is a Research Analyst with the Accountability Initiative