Discontent is simmering
among the government employees and teachers over the Contributory Pension
Scheme also called the National Pension Scheme that was launched in 2003 by the
then NDA government. The united Andhra Pradesh government and later the
Telangana State governments have also adopted the scheme. After 2004, the ranks
of government employees denied the defined benefit pension and brought under
this contributory pension scheme started to swell. They are realising its
ill-effects on them. There are about 1.15 lakh such employees in Telangana and
another 1.56 lakh in Andhra Pradesh, who are affected by the New Pension
Scheme.
As per this scheme, the central government employees appointed
on or after January, 1, 2004 will come under this scheme. Until then, the
government employees were getting pension as an additional post-retirement
benefit. But, the new scheme provides for pension based on the contributions
from the employees accrued in a fund set up for the purpose. The Pension Fund
Regulatory Development Authority Act (PFRDA) was enacted by the then UPA
government in 2013 with the support of the major opposition, NDA. In accordance
with the Act, the pension funds will be invested in the stock market and the
quantum of pension being subject to its vagaries. The lives of the retirees
would therefore swing as per the bulls and bears of capital market.
The government and the
promoters of PFRDA Act argued that the retired employees are to be benefited
immensely by the New Pension Scheme as the markets would yield them wealth.
But, this wealth perceived is actually market capitalisation. Its estimates are
just notional. In the previous scheme, the pension benefit was defined and
calculated based on the last drawn pay. Apart from this defined pension, the
retired employees in the old scheme would also get other benefits like gratuity
and commutation. But, in the new pension scheme, the quantum of pension is
completely dependent on the price fluctuations in the market. If the market
plunges due to one sentiment or the other, then the retirees would be losing
heavily for no fault of theirs. Stock markets across the world are prone to
either manipulation or speculation. The uncertainties deprive the government
employees the luxury of planning their retired life as they become vulnerable
to the peculiar behaviour of stock markets.
The origins of PFRDA are
in the Project OASIS (expert committee) Report (December, 1999), which
was constituted by the first NDA government. However, the tripartite Central
Board of Trustees of the Employees Provident Fund had, in a special meeting
held on February 8, 2000 and was chaired by the then labour minister,
unanimously held: “the (said) report is investment centric and not social
security or social insurance centric and contains a number of recommendations
and suggestions, which are inconsistent with the ground reality or practical
considerations.” The CBT was “unanimously of the opinion that the proposals in
the report … would seriously jeopardise the safety and future savings of the
workers as well as the whole concept of social security and social insurance.”
Even the Bhattacharya
Committee, appointed by the NDA government, did not recommend only a ‘defined
contribution’ scheme, which is the case with the New Pension System. It
recommended a hybrid Direct Benefit /Direct Contribution or mixed scheme. The
policy of pension reforms emerges out of the World Bank report titled,
“Averting the Old Age Crisis”. This report advocated pension sector reforms.
The essence of the World Bank report was not to tackle the crisis
faced by the elderly in their old age as professed in the title of
the report , but , to resolve the ‘crisis’ of the pension pay out burden of the
governments world over. This new scheme works out as follows. The gratuity and
commutation amount are paid out of the 60 percent withdrawn from the
accumulated contribution of the employees during their service. The remaining
40 percent will be invested in the annuities. The income yielding out of this
would be paid as pension. In the old pension scheme, the amount was essentially
dependent on the maximum wage one reaches by the time of retirement. The other
benefits like gratuity, commutation availed in the old Pension Scheme are
non-taxable but 60 percent withdrawals at the time of retirement under the New
Pension Scheme are subject to taxation.
The pension amount
earlier was guaranteed. But, now, it is left to markets. When the UPA
government defended the New Pension Scheme stating that it would yield more
returns than the pension obtained otherwise, Members of Parliament asked the
government to ensure a minimum guaranteed pension in the PFRDA Act itself. The
then Prime minister Manmohan Singh simply replied how it can be guaranteed as
it was dependent on market movements. Infact Section 20(2)(g) of PFRDA Act
inter-alia, provides: “there shall not be any implicit or explicit
assurance of benefits except market based guarantee mechanism”. The government
employees under this new pension scheme will be deprived of the government
Provident Fund account. Thus they will be losing the interest on the GPF
accruals and the facility of partial withdrawals from the GPF.
All the government
employees appointed on or after January, 1, 2004 were contributing 10 percent
of their pay into the contributory pension scheme. The government would
contribute a matching amount. This money is in the National Securities
Depository Limited (NSDL). The fund managers, who operate this fund, are
investing the same in the markets. The experience so far suggests that the net
asset value accrued on these contributions is not even matching the bank
interest. Thus, the employees who have earlier failed to comprehensively
comprehend the implications of the New Pension Scheme started feeling the pinch
of it. Hence, the disgruntlement!
Even the government is not going to benefit much as it has to
contribute 10 percent as a matching grant. It is not therefore relieved of the
pension burden. However, the industry gets access to massive public savings.
The magnitude of the public resources available for the private sector
is evident from the following statistics. By the end of November, 2015, about
16 lakh central government employees were brought under this scheme. The total
amount accumulated accounts for about 44,000 crores. Similarly all the state
government employees enrolled in the new scheme accounted for over 28 lakh. The
total amount was to the extent of over Rs 50,000 crore. This accrual will
increase each passing year.
Even the Supreme Court held that pension is a social security
measure and is the fundamental right. The apex court in D.S. Nakara &
Others vs. Union of India, 1982 stated that Pension is a right; not a
bounty or gratuitous payment. Pension also has a broader significance in that
it is a social-welfare measure rendering socio-economic justice by providing
old-age economic security to those who toiled ceaselessly in their youthful
heyday.
Privatising pension funds tantamounts to privatising social
security and depriving the protective freedom enjoyed by the employees, who
contributed to the government service for decades. The PFRDA Act applies to
those appointed after 2004. However, the pace with which pension reforms are
implemented across the world leaves no guarantee that the Act will not be
mandatorily extended to the employees recruited prior to 2004, who are now in
the old defined benefit pension scheme. In case, if the government does so, it
is unlikely that the courts will strike it down as Supreme Court in many
judgments held that when the State considered it
necessary to liberalise the pension scheme in order to
augment social security in old age to government
servants it could not grant the benefits of liberalisation
only to those who retired subsequent to the specified
date and deny the same to those who had retired prior to that date.
The government can escape
judicial scrutiny claiming that New Pension Scheme benefits employees.
Investing public savings in the stock markets should be the option of those who
save. But, the New Pension Scheme makes it mandatory. Each employee will have
his or her own priorities of expenditure in life. The economic necessities
differ from person to person. How can one be deprived of choice of spending
one’s surplus income? Even if the government ascribes to itself the parental
role, the mandatory savings should yield minimum guaranteed and better returns.
The risk-absorbing capacity of a retiree will be limited and it varies from
individual to individual.
Under this New Pension
Scheme, the employees will not get any family pension facility. Besides,
service charges will be collected from the employees for managing their pension
funds. As per the PFRDA Act, the government gives a matching grant. But,
this may not stand as evident from the experience of pension reforms in other
countries like in many East European countries. The governments often implement
fiscal austerity regime. They are legally mandated to control expenditure under
Fiscal Responsibility and Budget Management (FRBM) Act. In such a situation,
the possibility of government slashing its share of the contribution by
amending the Act cannot be ruled out. Noble laureate and former chief
economist of World Bank, Joseph Stiglitz warned that pension privatisation can
lead to worsening of economic crisis as evident from the experience of
Argentina.
