Pension systems should be conceived of as long-term financial contracts under which investors' contributions are exchanged for future benefits. Such contracts are said to be well managed if the transactions are handled in an affordable, reliable, and efficient manner. Pension systems operate under a multitude of constraints. Two most critical constraints are the participant's ability and willingness to save under the system and the availability of assets with which current savings can be converted into future retirement benefits. Currently, only about 9 per cent of the population has the benefit of old age security. Subsequent to Old Age Social and Income Security (oasis) report, a lot of deliberation has taken place on the need for pension reforms. However, we get a distinct impression that the subjects of discussion have so far only been pension products and players. Most of the structural issues have not been addressed at all.

Asset management companies (AMCs) and life insurance companies are in competition to grab the perceived pension opportunity and have made claims to the pension licence. These companies have designed their products even before the needs of investors have been fully discussed and understood. The bureaucrats in charge of reforms have already made up their minds that there should be only three product categories and that licensing should take place through a bidding process.

How were these three categories of products arrived at? There are no comparable products available in the market and there is no evidence of their demand or as to their performance. There is also a rush to select the players in the pensions game with the system for new government employees likely to be launched from January 1, 2004. The AMCs and insurance companies may be required to submit their bids soon. The fact that the players themselves will be ill-equipped to respond because the regulatory framework within which the sector will function is not yet ready seems lost on those in charge of the process. The participants' ability and willingness to save remains largely untested, which is another cause for worry.

Several issues remain unsettled. Firstly, how will pensioners be taxed? Chances are that taxation will be at the payout stage. This will force pensioners to hand over a sizable portion of their retirement benefits as taxes and also worry about irksome details like filing returns. Likewise, there will be one registry offering record-keeping services and all the bidding players will be dependent on this monopoly service provider.

Secondly, the bidding players will take services for collections from banks and post offices. And yet, the management rights for these funds will be auctioned. Thirdly, the withdrawal provisions will be liberal and withdrawals of upto 60 per cent of the accumulated amounts will be allowed upon retirement, for other than pension requirements. And, this is not the end of the story.

The long list of unresolved issues is indicative of the fact that very little attention has been paid to structural reforms and that there has been little consultation among the various stakeholders. As in the case of telecom, it seems the structural issues will be addressed only after the sector is thrown open to private players. As a result, a long-term investment instrument is likely to become a short- to medium-term product that will compete directly with bank deposits and mutual funds, with the end-losers being the old retired pensioners.

Mr. Ashvin Parekh is Executive Director, Deloitte Touche Tohmatsu. The view expressed in this article are those of the author and not necessarily those of his firm.