Anchor pension policy to its core design principles

by Renuka Sane.

Pensions policy, at its heart, stems from paternalism. When people stop working, they stop earning, and if they haven't saved enough, face the risk of destitution in old age. In most societies, the state feels compelled to step in with tax-payer funded cash transfers in the form of old age pensions. Over time, these commitments have expanded to cover entire populations. Yet financing the consumption of all elderly citizens through welfare transfers is fiscally unsustainable. As a result, pensions policy has focused on how to force individuals to build wealth during their working life. This coercion is justified on the grounds that people tend to underestimate their future needs, and discount the future too heavily. Assessment of pension policy, therefore, must recognise that it flows from the state's decision to compel individuals to save for their own future consumption. The legitimacy of this coercion depends on whether it contributes towards preventing poverty in old age. This article examines pension policy from such a perspective. The design of means-tested transfers for the already impoverished elderly, while significant, is not addressed here.

Four elements of a sustainable pension

This paternalistic foundation shapes the four defining features of a funded pension system. First, participation is mandatory. Second, the savings are illiquid. Third, the structure is low cost. Fourth, it converts savings into a stable stream of income in retirement. These features make a pension different from other forms of saving or investment. Take away one of them, and the system begins to resemble an ordinary investment account rather than a vehicle for old age income security.

Let us begin with the first feature: mandatory participation, where individuals are forced to save a proportion of their monthly income into a pension account. But, compulsion requires an employment relationship so that contributions can be enforced. Extending such schemes to the informal sector where workers move between jobs or remain outside formal payroll systems is a challenge. Further, there is the question of what contribution rate to mandate: if it is set too low, the accumulated savings will be inadequate for retirement; if set too high, it will unduly constrain consumption during working life.

The second feature, illiquidity, is put in place to provide income in old age, not to finance mid-life consumption. This design feature is always contested. Individuals argue that since it is their money, they should be able to access it when they need it. Such demands become greater when contribution rates are very high. Policymakers often give in, allowing partial withdrawals or loans against the accumulated corpus. But withdrawals can leave retirees with inadequate balances, defeating the entire purpose of the mandatory contribution.

The third feature, low costs, is crucial because of the long horizon of pension saving. Fees and commissions, even if small annually, compound heavily over decades. High costs can erode a significant portion of the final corpus. Keeping costs low is especially important because participation in a pension scheme is compulsory; having coerced individuals to save, policy cannot then channel their money into high-cost funds that primarily enrich fund managers. The global experience suggests that keeping costs low requires deliberate policy design. This can be achieved through two ways.

1. Auction-based system for selecting limited fund managers (as was the case of India's National Pension System (NPS)). The larger the corpus with a fund manager, the lower the fees. For example, Vanguard S&P500 ETF has assets of about US$1.5 trillion, and an expense ratio of about 0.03% (3 bps). When fund managers are given a specific mandate to manage a large corpus, costs can be negotiated down. Pension policy, especially when the market is very small, must then decide between the competing trade-offs of multiple managers and choice vs. limited fund managers and low costs.

2. Limit investment options to low-cost passive index funds. Over long periods, index funds typically outperform most actively managed funds, net of costs. Critics argue that restricting investment options stifles innovation and deprives individuals from exercising choice. But the idea of unfettered choice has also been questioned, given that most individuals may not be equipped to make complex financial decisions. These trade-offs become relevant because of the forced nature of savings.

A reasonable middle ground lies in offering a limited number of fund managers who provide a restricted menu of low-cost index fund options. Index funds with equity exposure provide for an upside and international exposure can help reduce risk through diversification.

The final feature, a retirement income, is what completes the cycle. This can be achieved through an annuity, which converts the accumulated balance into a guaranteed stream of payments for life. In the case of an inflation-indexed annuity, the payments are adjusted for inflation throughout retirement. While annuities provide longevity insurance (and can sometimes provide inflation protection), they are often unpopular because they appear to offer poor returns and lack flexibility. Pricing of annuities may be a challenge when the bond market is itself underdeveloped. The compromise in many systems is to mandate partial annuitisation requiring that a fraction of the corpus be used to buy an annuity while allowing flexibility for the rest. The other alternative is to design systematic withdrawal plans that allow for gradual withdrawals from the corpus. This doesn't insure against longevity risk, but is often preferred for its simplicity and flexibility.

It is important to emphasise the word funded when outlining the four features. If taxpayer resources are used to finance retirement, features such as guaranteed returns can be built in. However, such arrangements are often vulnerable to funding pressures over time. If the system is to remain self-sustaining, the investment risk must rest with the individual unless that risk is explicitly priced and paid for.

Pensions in India

The central question for any government, then, is how to achieve these four features. Let's consider how the EPF, NPS fare on these parameters, especially relative to a mutual fund that is not a pensions product.

Feature	Mutual fund	EPF	NPS
Mandatory	No	Yes (for formal sector)	Somewhat
Illiquidity	No	Cannot withdraw 25% of corpus	Yes
Low cost	No	Somewhat	Yes
Retirement income	No	No	Yes

A mutual fund is not mandatory, or illiquid, or low cost. It makes no promises of a retirement income. These features are not expected from a mutual fund, as it is not a pensions product.

EPF

The Employees Provident Fund (EPF) functions effectively on the issue of mandatory contributions, as it is meant for formal sector workers, where employment is defined and contributions are linked to payroll. However, its contribution rate, around 24%, is high, making it burdensome, particularly for low-income workers. Early withdrawals from the EPF have been a persistent concern. The EPFO has recently restricted withdrawals to 75% of the corpus (and hence 25% of the corpus is illiquid till retirement), which is an improvement, but still undermines the purpose of a pension product. The EPFO needs to consider a calibration of the contribution rates. The administrative costs, borne implicitly through an employer levy of about 0.5% of wages, make it relatively expensive. Moreover, it offers no choice in investments and provides a guaranteed rate of return, which limits both flexibility and upside potential. Finally, by paying out a lump sum at retirement, the EPF exposes individuals to longevity risk. From a pension design perspective, the EPF would benefit from reforms across all four foundational elements of a pension system.

NPS

The National Pension System (NPS) did not encounter challenges of coverage when participation was mandatory for government employees. The total AUM of NPS in September 2025 was about US$178 billion (Rs. 15.8 lakh crore), of which 85% was with the three public sector fund managers (SBI Pension Funds Pvt Ltd, LIC Pension Fund Ltd, UTI Retirement Solutions Ltd). The Pension Fund Regulatory and Development Agendy (PFRDA) has capped investment management fees for all pension fund managers, which continue to be some of the lowest in the world (between 3bps - 9bps). As the total corpus grows these may further come down. The NPS permits equity exposure but limits international investments, thereby constraining diversification opportunities. The scheme allows only three partial withdrawals during the entire subscription period and limits the amount that can be withdrawn. It would do well to reserve these safeguards, which reinforce the principle of lliquidity that underpins any pension scheme. It requires artial annuitisation at retirement and offers a systematic ithdrawal plan, with ongoing efforts to design additional tructures that can strengthen income security in old age. These are steps in the right direction.

Despite these advantages, the transition to the Unified Pension Scheme (UPS) has brought forth a fundamental challenge for the NPS: building a base of contributors for whom saving is compulsory. The natural tendency will be to compete in the market for voluntary savings. More recently, under the Multiple Scheme Framework (MSF) fund managers are permitted to design and offer multiple schemes tailored for different subscriber segments. While this will allow more choice for subscribers, it runs the risk of diluting what makes the NPS a pension product. A mature mutual fund industry already caters to voluntary investors, and an excessive focus on marketing voluntary contributions risks undermining the NPS's defining advantage - its low-cost, low investment options structure.

Conclusion

Retirement schemes, whether the EPF or the NPS, are only one component of an individual's broader savings portfolio. Yet, for the portion that is locked into a dedicated pension scheme, fidelity to the four core design principles is crucial. This is especially important as both schemes, and particularly the NPS, consider various reforms related to the design of different schemes, valuation models and withdrawal options. The focus of a pension system should remain on expanding wholesale participation through large-scale group subscriptions, rather than competing directly in the retail savings market.

The author is a researcher at TrustBridge Rule of Law Foundation.

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Electricity cost recovery and the political imagination: A comparison between private and public distribution in India's biggest cities

by Ajay Shah and Susan Thomas.

The problem

The Indian electricity system has major problems. It suffers from a central planning problem, where officials control the resource allocation, which undermines efficiency and innovation. It has a carbon emissions problem, with the lack of an effective path into the clean energy transition. It has a public finance problem, where debt sustainability in some states is materially affected by theft and by subsidies are paid for by the exchequer. As an example, in Mehta et al. 2024, we show that for Tamil Nadu, "A complete electricity sector reform versus business-as-usual translates into an FY 2028 outcome for the debt/GSDP ratio of 32.47% vs. 43.53%, and an IP/RR ratio outcome of 19.71% vs. 26.12%".

A root cause of these difficulties is subsidised and stolen electricity. As there is no free lunch, the lost revenues have to show up as a combination of explicit budgetary allocations for electricity subsidies, or distress for the distribution company. The precise mechanisms through which electricity is stolen are surprisingly subtle, e.g. as shown in Mahadevan 2024, which casts a shadow on conventional measures of AT&C losses. While there is some movement in favour of more transparent on-budget subsidies (Jaitly and Shah 2024) in states such as Karnataka, the overall problem reflects a combination of transparent on-budget subsidies, weak bill collection, and theft.

Figure 1: Feedback loops in the Indian electricity system

Source: Figure 10 (page 15) from Jaitly et al. 2025.

 

As Figure 1 shows, there are multiple positive feedback loops in operation in the Indian electricity system, which are grinding away, worsening the distress. Inadequate payment leads to SEB distress, which in turn forces high tariffs on paying C&I consumers, driving them to exit the grid and further worsening SEB finances. Inadequate payment for electricity, by many firms and households, is the core problem which then plays out in various ways.

The developments in Pakistan in recent years give us illustrations of how such causal forces could play out in the future in India (Economic Times, 2025). Conversely, the imposition of a single price for electricity applied to all buyers of electricity would materially change these feedback loops by alleviating financial distress in electricity distribution.

Household data as a research tool

A significant amount of theft of electricity is surely done by firms, who have high incentive to put in effort to obtain stolen electricity. But the overt political problems of subsidised electricity for households or agriculturists, and the political economy problems of a large number of persons stealing electricity, are uniquely present in the household sector. Household survey data offers valuable knowledge about the problems. Instead of starting from budget disclosures and the data as reported by distribution companies, we go bottom up by asking households what they pay for electricity. There are grounds for trusting the CMIE CPHS measurement of electricity expenditures at the household level (Das et al. 2024).

Figure 11 (page 19) from Jaitly et al. 2025 shows how electricity expenditures in the household data in Tamil Nadu are unusually low by Indian standards. While this appears out of line when we think that Tamil Nadu is richer than the overall Indian average, there is a need for more careful analysis which compares similar households and juxtaposes different arrangements for electricity distribution.

The gains from private distribution

In the present research, we focus on two groups of the biggest Indian cities with alternative electricity distribution arrangements. Bombay, Delhi and Calcutta have private distribution. Bangalore and Madras have public sector distribution. Using the CMIE CPHS data, we work out the median household expenditure on electricity in these two groups of cities. These are large datasets: In 2024, Bangalore and Madras add up to 1,641 households and Bombay, Calcutta and Delhi add up to 2,667 households. Given these large sample sizes, the median estimates are statistically robust. Weighted estimates are used, which can be interpreted as populated-weighting across the cities.

 

Figure 2: Median household electricity expenditure in large cities, private vs. public electricity distribution

Source: Authors' calculations using CMIE CPHS data

Figure 2 shows these facts. This shows much superior cost recovery for households in cities with private distribution. Further, it shows that over the years, the payment per urban household under public sector distribution has actually declined in nominal terms. With private distribution, it has risen. This rise is consistent with increased ownership of electricity-consuming appliances over these three years, by urban households, and the rising price of electricity in the context of overall inflation based on the inflation target of 4%. That expenditures by households under public sector distribution have not risen, in nominal terms over three years, is a remarkable finding.

While we may broadly think that household prosperity in Bombay, Delhi and Calcutta is similar to that seen in Bangalore and Madras, we control for this by placing households into nationwide urban consumption quartiles.

Quartile	Median Cons.	Median electricity (private)	Median electricity (public)
	(monthly)	(monthly spend)	(monthly spend)
Q1 (poor)	10,536	500	0
Q2	14,755	665	0
Q3	19,307	775	0
Q4 (rich)	29,522	1500	75

The quartiles are formed based on the all-India distribution of urban household consumption as seen in the CMIE CPHS data in 2024. The all-India median urban consumption runs from Rs.10,536 a month for the poorest quartile to Rs.29,522 a month for the richest quartile. With this in hand, all the urban households in Bombay, Delhi, Calcutta and then Bangalore and Madras are placed into the appropriate quartile bins. Since the bins are based on all-India urban consumption, households in each group (private distribution/public distribution) will not be equally split across the quartile bins. As we are studying the biggest cities in India, more households are likely to be slotted in higher consumption bins. We report the median value of the monthly electricity expenditure for the two groups.

These results show that after controlling for affluence of the households, public sector distribution obtains much lower payments for electricity when compared with private sector distribution. In the future, this work needs to be made statistically more rigorous by setting up a matching scheme where households in Bangalore/Madras are matched to households in Bombay/Delhi/Calcutta based on asset ownership. However, the magnitude of the difference suggests the core finding is robust.

The political economy of the Indian electricity sector

These results shed light upon questions of political economy. Politicians in states like Karnataka or Tamil Nadu are used to thinking that it is difficult to force households to pay for electricity. Politicians in Delhi, Maharashtra and West Bengal have successfully squared this circle: they are able to impose much higher expenditures upon urban households, with the consequential gains for the health of the electricity system and for state public finance.

The most striking finding here is the table organised by consumption quartiles. Why do top quartile households of one group pay Rs.1500 a month for electricity while the same kinds of households of the other group pay Rs.75? This table helps expand the political imagination across the country: What are the politicians of Maharashtra, Delhi and West Bengal getting right, that others are not? There should be a strong demonstration effect here: How are politicians in Maharashtra, Delhi and West Bengal doing the right thing and politically surviving? What is the political settlement in these states that has enabled their superior durable arrangement?

A striking feature of these results lies in the fact that Delhi, which is pooled with Bombay and Calcutta in this work, actually has a large on-budget electricity subsidy program. Even though Delhi has a big subsidy program going, we have a strong result where the group of cities with private distribution includes Delhi. This suggests that private distribution adds value even under a large on-budget subsidy. This brings a new nuance to the debates around the gains from a transparent on-budget subsidy (Jaitly and Shah, 2024). Private distribution, which brings gains in collection and theft reduction, seems to matter over and above the standard public finance gains from a transparent on-budget subsidy.

Conclusion

These results reflect a summary statistic of the working of the electricity system in the two groups of cities, bringing together all aspects that impact household payments for electricity, including overt subsidies, various mechanisms of theft, and the efficiency of bill collection. Future research is required on the sources of improvement through private distribution. Is it better metering and billing technology? A regulatory framework that insulates tariff-setting from short-term politics? Better enforcement against theft?

Section 9.7 of Jaitly et al. 2025 shows the elements of information that go into monitoring the electricity reform at the level of one state of India. The analysis presented here carries this objective one step forward.

This article emphasises the comparison between five cities and not states. Potentially, there can be a divide-and-conquer approach where urban distribution reforms are separated out from the remainder of the state. Once a successful distribution company is established, its footprint can be gradually enhanced, e.g. there is a ready path for the successful private distribution model in Bombay to cover the full footprint of the Mumbai Metropolitan Region (MMR).

Jaitly and Shah, 2021, emphasise that the path to the Indian climate transition runs through the problems of the electricity sector. The political economy of electricity subsidies and theft is a key problem holding back the electricity sector. The empirical political economy results here help illuminate the questions and show pathways to progress.

Such natural experiments, with different parts of the country trying different things, represent the gains that come for the electricity system from the Constitutional scheme where electricity was largely made a state subject. When only one solution is used all through the country, there is reduced experimentation and inferior knowledge. There is much merit in the subsidiarity principle: problems should be placed at the lowest level of the government where they can possibly be placed (Shah and Varma, 2024).

Bibliography

The Price of Power: Costs of Political Corruption in Indian Electricity, Meera Mahadevan, American Economic Review vol. 114, no. 10, October 2024 (pp. 3314–44).

The usefulness of the CMIE household survey data for electricity research in India, Susan Das, Renuka Sane and Ajay Shah, The Leap Blog, 8 May 2024.

Pakistan's quiet solar rush puts pressure on national grid, Economic Times, 16 July 2025.

The lowest hanging fruit on the coconut tree: India’s climate transition through the price system in the power sector, Akshay Jaitly, Ajay Shah, XKDR Forum Working Paper 9, October 2021.

Electricity subsidies are getting better, Akshay Jaitly and Ajay Shah, Business Standard, 26 May 2024.

Electricity reforms in the economic strategy of Tamil Nadu, Akshay Jaitly, Renuka Sane, Ajay Shah, XKDR Forum Working Paper 38, February 2025.

The electricity chokepoint in Tamil Nadu public finance, Charmi Mehta, Radhika Pandey, Renuka Sane, Ajay Shah, XKDR Forum Working Paper 31, February 2024.

India needs decentralisation, Episode 47 of Everything is everything, 17 May 2024.