Social security for IT companies?

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's 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 benefi ts that is anchored to employer, ie,
the Provident Fund Organization. The context for social security is also unique
for IT fi rms 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.

PLANNING SOCIAL SECURITY

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 benefi t that does not
hedge inflation and delivers feeble terminal value. Implementation fl aws can fi
ll pages of this journal but the EPFO's poor delivery ensures employees do not
have information and more often than not timely access to their funds on
retirement. Impact: An employee benefi t 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 diffi culties and one gets social security
that employees jest is a black hole!

Gratuity: It is privatised and offers employers the benefi ts of choice
(insurers and asset allocations) but suffers from being a defi ned benefi t 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 defi ned contribution group pension
plans) coincided with the fall in interest rates on home loans. FBT helped the
fence sitters decide.

THE ALL NEW 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 benefi ts 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) Defi ned contributions; nobody wants to pay for
expensive defi ned benefi ts,

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 fl exibilities and multiple and competing fund managers as
its USP, we believe the drivers towards the NPS would be its employee anchored
structure, centralized recordkeeping plans, distribution mechanisms and low
costs vis-a-vis other centralized social security plans.

Source: Dataquest