IDFC Institute Visiting Fellow Renuka Sane writes in Indian Express: "Pension reform is important. But next time, Centre must put in more rigour."

Excerpts below:

"The Union budget’s proposal — now unfortunately rolled back, given the furore — to rationalise the tax treatment across the NPS and EPF had raised quite a storm. Withdrawals greater than 40 per cent of the accumulated balance in the EPF would be subject to tax, unless they were used to purchase an annuity. For the EPF, this had meant the EEE tax-treatment would become EET (as 40 per cent would still be tax-exempt)...

One aspect of the discontent was the tax itself. The withdrawal of a tax-break never goes down well... However, a larger issue was that the tax was only applicable on a lump-sum withdrawal and not on annuity purchase... Such state paternalism — mandating members what to do with their retirement savings — wasn’t going down well...

On the face of it, annuitisation is not such a bad idea...

But just mandating annuitisation is also not enough. We must ask what level of annuitisation is optimal. Different countries have approached this differently. The Chilean approach has been to restrict lump-sum distributions and mandate fixed inflation-indexed annuities or lifetime-phased withdrawals. Australia is more flexible in allowing lump sums. Most recently, the UK has done away with its rule of mandating the purchase of an annuity by the age of 75, allowing for programmed withdrawals. The US has very little mandatory annuitisation. If the objective is to ensure a minimum consumption after retirement, annuitisation can be mandatory only to the extent required to buy the minimum annuity. The nominal annuity may not be able to buy a minimum consumption basket if inflation rises over the retiree’s lifetime. Policy then needs to consider mandating the purchase of an inflation-indexed annuity.

Annuities can be expensive for the poor as they have lower life expectancy...

India’s annuity market is also underdeveloped...

Once individuals are choosing the annuity product as they retire, issues of mis-selling are likely to come to the forefront...

The government’s idea of rationalising taxes across the EPF and the NPS, and bringing in an element of annuitisation, important and useful. The next time round, it should put in a lot more rigour before proposing changes, so that they don’t get rolled back."