People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
February 04, 2007
BENGAL FM URGES IN-DEPTH DISCUSSION
New Pension Scheme Unacceptable
Below we reproduce the full text of the speech made by Dr Asim K Dasgupta, minister for finance and excise, government of West Bengal, at the conference with chief ministers and state finance ministers on ‘Issues related to Pension’:
WE appreciate the convening of this conference of chief ministers and state finance ministers on issues related to the New Pension Scheme and the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005. It gives us an opportunity to express our views on a specially important aspect of social security in terms of pension for the government employees as well as other sections of working population of our country.
TWO PENSION SYSTEMS
For the government employees and others, such as teachers, employees of public undertakings, there has evolved over the years a social security scheme in terms of a defined benefit pension system. In this pension system, defined benefit in terms of 50 per cent of last salary (or average of last ten months’ salaries) drawn, commuted value of pension, gratuity, Dearness Relief etc. is ensured by the government. In West Bengal, the defined benefit pension system covers not only all state government employees, but also includes employees of state public undertakings, teachers and non-teaching staff of all state government-aided educational institutions from the primary to the university level as well as employees of the municipalities and the panchayats.
As against the, defined benefit pension system, a New Pension System (NPS) has been introduced by the government of India from January 1, 2004 for new entrants to services in the central government (other than the Armed Forces). This NPS means a shift from the defined benefit pension system to a defined contributory pension system. The new system works on defined contribution basis and has two tiers - Tier I and II. Contribution to Tier I is mandatory for all government employees (joining services from January 1, 2004), whereas contribution to Tier II is optional and at the discretion of the employees. In Tier I, the government employees have to make a contribution of 10 per cent of the basic pay plus dearness allowance which will be deducted from the salary bills. The government also has to make a matching contribution. Tier I contributions (and investment returns) are kept in a non-withdrawable Pension Tier I Account. Tier II contributions are kept in a separate account which is withdrawable at the option of the employee. In order to implement the scheme, there would be a Central Record Keeping Agency and several Pension Fund Managers to offer to the government employees, in the initial formulation, three categories of schemes A, B and C based on the proportion of investment in fixed income instruments and equities.
In order to give the NPS a statutory basis and to put in place a regulator with statutory powers, the union government introduced the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005 and after obtaining the recommendations of the Standing Committee on Finance has now proposed an amendment to the Bill to (a) make available to subscribers a further option – ‘D’ of 100 per cent investment of their fund in government securities, (b) provide that at least one of the pension fund managers’ be a government company or owned by a government company or companies, and ( c) prohibit investment of fund of subscribers overseas.
It is important to note that on the issue of providing a government guarantee of the retirement benefit, the New Pension System states [in Clause 20(f) of the Bill] that “there shall not be any implicit or explicit assurance of benefits except market based guarantee mechanism to be purchased by the subscriber.”
Despite this critical absence of assurance of benefits in this new scheme, the Defined Contribution Pension System is sought to be introduced in place of the Defined Benefit Pension Scheme on the basis of three arguments: (a) financial unsustainability of the Defined Benefit Pension System, (b) lack of choice of schemes and fund managers in this pension system and (c) inadequate coverage beyond the employees and workers in the organised sector.
We present our views on each of three important points mentioned above, as well as loss and gain of the government and the employees from New Pension System.
FINANCIAL SUSTAINABILITY OF THE DEFINED BENEFIT PENSION SYSTEM
The union finance ministry has made an estimate of rise in pension expenditure and increase in the ratio of pension expenditure to tax revenue taking the entire period 1993-94 to 2004-05 as a whole, and indicated a compound growth rate of pension expenditure of around 21 per cent for the central government and 27 per cent for the states, and an increase in the ratio of pension expenditure to tax revenue from 9.7 per cent to 12.6 per cent for the central government and from 5.4 per cent to more than 10 per cent for the states in 2004-05. On the basis of trend rate of pension expenditure and tax revenue over this period (1993-94 to 2004-05) as a whole, the projection has been made for financial unsustainability in terms of rise in pension-tax revenue ratio.
If, however, instead of taking the data for the entire period from 1993-94 to 2004-05 as a whole, the relevant data are carefully noted for the recent years, then a different picture emerges. In recent years, after introduction of the Value Added Tax in the states, growth rate of tax revenue of the states has increased significantly –– from a historic rate of growth of 12 per cent of sales tax revenue to more than 20 per cent growth rate of VAT revenue. Moreover, rate of growth of pension has also started falling in recent years. For West Bengal, for instance, during the last three financial years, growth in pension expenditure has been generally below 10 per cent.
On the basis of large sample data, and using standard actuarial techniques and LIC life expectancy figures, we have made a projection of likely behaviour of the ratio of pension expenditure to tax revenue for the state of West Bengal. Even if an allowance is made for increase in pension expenditure after accommodating possible recommendations of Pay Commission, in a balanced manner in terms of a 15 per cent annual increase in pension bill (in place of about 10 per cent annual increase now), and the tax revenue is projected to grow at 18 per cent, then the ratio of pension expenditure to tax revenue will, in fact, steadily fall to 9.6 per cent in 30 years, i.e., in 2037. If the tax revenue is projected to grow at 20 per cent, then the pension-tax revenue ratio will steadily fall further to 5.7 per cent. In other words, on the basis of careful assumptions and appropriate steps on pension expenditure and tax revenue growth, financial sustainability of the Defined Benefit Pension System can indeed be ensured.
LOSS AND GAIN OF THE GOVERNMENT FROM THE NEW PENSION SCHEME
The state government has also worked out the estimated expenditure for payment of government’s contribution under the new pension scheme. It has been estimated on the basis of 100 per cent replacement rate that the state government’s expenditure on this account will be Rs 33 crore in the first year and will increase to Rs 2,495 crore in 22 years, in addition to the expenditure on account of existing pension scheme. These requirements will go on increasing for 33 years, assuming that the newly employed recruits will render 33 years of service before retirement. Therefore, for about 33 years, after the introduction of the new pension scheme, the total pension expenditure of the state government will keep on increasing at a very high rate. It is only after 33 years that the effect of the new pension scheme can be felt. The contribution under the New Pension Scheme will then become more or less steady except for inflation-related increases and the pension expenditure under the existing scheme will come down as there will be no net addition to the number of pensioners covered by the existing scheme.
There can be net saving under the New Pension Scheme only when the reduction in expenditure in relation to the projected expenditure under existing scheme is more than the contribution to be paid by the government. This can only happen some time after 33 years. There is, therefore, no gain to the government at least in a time horizon of about 33 years. In fact, during this period, the government will have to bear substantial, additional burden.
LOSS FOR EMPLOYEE FROM THE NPS
Now let us look at the new pension scheme from the point of view of the employees. There will clearly be a cut in the wages of employee to the extent of 10 per cent of pay including dearness allowance throughout his service. This is a loss to the employee in terms of wages. Let us see what happens to his pension. Let us take the case of a Group D employee who is recruited in the year 2007. We assume that the employee will retire in 2040 after rendering 33 years of service. As per existing scheme of the government, he will get movement to the first, second and third higher scales after 8, 16 and 25 years of service. Thus, if the employee does not get any promotion, his pay including dearness allowance will increase from Rs 4,446 per month to Rs 8,943 per month at the end of 33 years. We are not considering the effect of inflation on salary. At 2006-07 price, the employee would be entitled to the following retirement benefits under the existing scheme: -
i) Pension including pension - Rs 4,472 per month relief, before commutation (In West Bengal, at the rate of 50 per cent of last salary drawn)
ii) Gratuity - Rs 1,46,702
Let us assume that an employee contributes 10 per cent of his pay including dearness. allowance every month and the government makes an equal contribution. We also assume that the deposit earns a real rate of interest of 2 per cent per annum, with nominal rate of interest being appropriately higher depending on the rate of inflation. Now, if from the amount accumulated at the end of 33 years, the gratuity (to which he is entitled as per existing pension scheme) is paid off and the balance is converted into an annuity with survivor benefits, the employee would get an amount of Rs 3,600 per month, which is about 80 per cent of the pension he would have got under the existing scheme. In other words, the employee will lose 20 per cent of his existing retirement benefits if he comes under the new pension scheme. Moreover, the annuities are generally not inflation-indexed and therefore, the annuity will remain fixed throughout his life and the life of the survivor. This means that with increase in the cost of living index, the pension will fall further, unlike in the case of existing scheme in which an employee gets 100 per cent neutralisation for increase in the cost of living index through dearness relief. Thus, there is a serious loss to the employee in so far as his retirement benefits are concerned in addition to the loss that. He has suffered through effective wage-reduction during his service.
CHOICES OF MULTIPLE SCHEMES AND FUND MANAGERS
The special features of the New Pension Scheme include a choice among different options of mix of government bonds, corporate bonds and equity, with Option A consisting of at least 60 per cent of government bonds, at least 30 per cent of corporate bonds and upto 10 per cent of equity, Option B consisting of at least 40 per cent of government bonds, at least 40 per cent of corporate bonds and upto 20 per cent of equity, Option C consisting of at least 25 per cent of government bonds, at least 25 per cent of corporate bonds, at least upto 50 per cent of equity and Option D consists of 100 per cent of government bonds. But, according to the assessment made in Annexure of the 21st Report of Standing Committee of Finance of Lok Sabha it is seen that even with all these options only about 40 per cent (under Option D) to about 80 per cent (under Option A) of merely one aspect, i.e., 50 per cent of last salary drawn that can be protected. Losses of employees on other accounts have, already been indicated in Section 5. However, even with respect to this fractional protection, there is no assurance, except market based guarantee. But then, stock markets have never remained consistently strong over a long period of time. There have been periods when the stock markets have crashed. This volatility of stock market is a cause of serious concern about the sustainability of the New Pension Scheme itself.
Another feature of the new scheme is choice of fund managers, including private fund managers. But, the experience of pension funds which have been privatised in various countries show that there is a high service fee charged by the pension fund companies which is again to be borne by the employees resulting in low effective returns on pension funds, as in the case, of Chile and Britain.
In other words, the options of schemes and fund managers in the New Pension Scheme do not necessarily lead to any gain for the employees, particularly for the vast majority of Group C and Group D employees.
SOCIAL SECURITY SCHEMES FOR WORKERS IN UNORGANISED SECTOR
One of the purposes of the proposed legislation is stated to be the need for bringing the workers in the unorganised sector under social security schemes. It has already been shown in Section 3 that for the next 33 years, there would be no savings on account of introduction of the New Pension Scheme. In fact, there would be substantial additional expenditure on account of payment of government’s contribution under the new scheme. Introduction of the New Pension Scheme cannot, therefore, yield resources which can be made use of for bringing workers in the unorganised sector under the purview of social security scheme in the foreseeable future.
On the other hand, it may be mentioned with modesty that in the state of West Bengal, along with the existing Defined Benefit Pension Scheme for the government employees, employees of the state undertakings, teachers and employees of municipalities and panchayats, the state government has introduced about 5 years back, a Provident Fund Scheme for unorganised workers (now covering 8 lakh) and a Pension Fund Scheme for landless labourers (now covering 7 lakh). This ambit of benefited workers in the’ unorganised sector is expanding every year. In other words, the West Bengal experience shows that it is indeed possible to have both Defined Benefit Pension System and social security scheme for the unorganised sector without posing the problem as “either or”, but in terms of mutual inclusion. Why cannot this be attempted at the national level?
RECRUITMENT OF GOVT EMPLOYEES
The government employees who would be affected by the New Pension Scheme are the new entrants to government services. For a balanced growth with objectives of productive employment generation and more social inclusion, there is a need in the country for an appropriate welfare role of the government, particularly in the spheres of infrastructure and social sectors. This calls for an efficient public service delivery system which, in turn, depends on the quality of the civil servants who are responsible for delivery of these public services. It is often difficult for the public sector to pay a salary package comparable to what is available in the private sector. Already signs of talented young people preferring private sector assignments to civil services are visible. This trend needs to be reversed. ‘The Defined Benefit Pension System’ in case of government employees tends to compensate for a lower salary package. The transition from this Defined Benefit Pension to the Defined Contribution Pension System will make civil services more unattractive. It would make recruitment of persons of high quality to public services even more difficult. The country cannot afford to create such a situation.
For all these reasons – particularly the cut in salary and pension of the employees, absence of government guarantee for retirement benefits in the New Pension Scheme and the distinct possibility of a sustainable Defined Benefit Pension System along with extension of social security system for the unorganised sector – we are not in a position to accept the New Pension Scheme. We strongly urge that a more in-depth factual and analytical discussion is essential before taking any further step towards the New Pension System. (INN)