PENSION IN PERIL This article was published in the souvenir of odisha Economic Association (OEA)-2014 SANTOSH KUMAR MOHAPATRA INTRODUCTION In recent times, parliament have passed the most contentious Pension Fund and Regulatory Development Authority (PFRDA) Bill 2011 .The Bill, will give statutory powers to the interim regulator( PFRDA) to regulate pension products as well as the fledgling New Pension Scheme rechristened as National Pension Scheme .The Bill also formally changes the name of the New Pension System (NPS) to the National Pension System (NPS). One of the inimical decisions of the Bill is that it also aims to open up the pension sector to overseas investors and links the ceiling on foreign investment in pension fund managers to a related law governing the insurance industry. If the insurance foreign Direct Investment (FDI) limit goes up to 49 per cent, the pension sector limit may also go up to that level. This is in contravention of the recommendation of the standing committee of finance that FDI in pension should not exceed 26 percent. GENESIS OF PFRDA Interestingly, the Pension Fund Regulatory and Development Authority (PFRDA) Bill was first mooted 10 years ago by the then NDA government to abdicate the responsibility of defraying the cost of ``defined benefit`` based pension schemes. But without Parliamentary approval, unethically, the New Pension Scheme (NPS) was compulsorily thrust upon central government employees (except Armed Forces) who entered service on or after Jan.1, 2004 for whom government notified a new contributory pension scheme on 22nd December 2003 through executive order. However due to change in government, in March 21, 2005 then Congress led UPA-1 Government introduced PFRDA Bill, 2005 in Parliament for approval. But it was referred to the Parliamentary Standing Committee, as there was opposition as it had direct bearing on the pension prospect. Surprisingly, without any statutory status to the PFRDA, not only central government but also 26 State /UT Governments have already notified NPS for their employees in order to shift the fiscal burden to pensioners.NPS has also been launched for all citizens of the country including unorganized sector workers, on voluntary basis, with effect from May 1, 2009. Since the PFRDA bill 2005 lapsed in Parliament with the expiry of the previous Lok Sabha in 2009, same was reintroduced in March, 2011 with minor changes. DEFINED BENEFIT VS DEFINED CONTRIBUTION The terms retirement plan and superannuation refer to a pension granted upon retirement of the individual. It is known as retirement plans in the United States, pension schemes in the United Kingdom and Ireland and superannuation plans (or super) in Australia and New Zealand. In a`` Defined-Benefit`` pension plan, employees accrue the right to an annual monetary benefit that begins upon retirement. Such payment is usually determined as a flat percentage of a worker’s average salary over the final years of employment multiplied by the worker’s years of service with the employer. In a ``Defined-Benefit`` plan, the employer is responsible for determining how much money to set aside for its employees’ retirement fund and how to invest it—the risk is assumed by the employer rather than the employee. If a pension fund is short when workers retire, the state has three options: raise taxes, cut spending, or default on its obligation to retired employees. Under Defined Benefit-based Pension Scheme, which is non-contributory, central government employees used to get pension at 50% of their last drawn pay and the pension amount used to get revised with the changes in price indices. To get this system of assured pension system in place, the government employees had to forego their right to contributory provident fund, i.e., employer’s matching contribution to provident fund (PF). The pension liabilities of central government are being met on a ``Pay-As-You-Go basis``. While the existing Defined pension Scheme of the government offers assured pensionnary benefits, NPS has a defined contribution structure, based on the principle that you save while you earn`` where an individual can decide where his contributed money will be invested. This contributory New Pension Scheme (NPS), somewhat similar to a much celebrated 401k scheme (a type of retirement savings account in the US operated by a reputed mutual fund company listed on the US stock exchange) but not in totality.NPS follows an EET (exempt-exempt-taxable) structure, similar to its global peer, but the withdrawal amount after the age of 60 can’t remain invested nor can be withdrawn fully. The major drawback of NPS Further, NPS denies commutation facilities and is not clear about family pension. It will not be linked with price indices (DA not available), as a result of which pension amount will decline in real terms while taking account the ill effects of inflation. MODUSOPERANDI OF NEW PENSION SCHEMES (NPS) The PFRDA Bill, 2011, passed in Parliament envisaged a shifting from the Defined Benefit-based Pension Scheme to Defined Contribution-based National Pension Scheme (NPS) where the monthly contribution by the employee would be 10% of the Basic pay and dearness allowance (DA) and matched by the equal contribution from central government. The contributions and investment returns would be deposited in the so called Tier-I account, which together will form the pension account for the concerned employee and also cannot be withdrawn. Individuals can normally exit at or after age 60 for Tier-I. Upon exit, an individual will be required to invest 40% of the pension to purchase an annuity from an IRDA (Insurance Regulatory and Development Authority)-regulated life insurance company. Individuals may also have a voluntary Tier-II account, which can be withdrawn (either part or whole), as an option. The beneficiaries of NPS will also have the option to leave the pension system prior to age of retirement, in which case, the mandatory annuitisation- to buy an insurance annuity scheme -would be 75% of the pension wealth. It means 25% of pension wealth can be withdrawn from the individual pension account subject to the conditions, such as, purpose, frequency and limits, as may be specified by PFRDA. The NPS envisaged a central record keeping agency and several pension fund managers appointed by the PFRDA to offer three categories of schemes to government servants, namely, options A, B and C based on the ratio of investment in debt and equities. . As on August 14, 2013, eight pension fund managers managing 5.28 million subscribers and a corpus of Rs 34,965 crore .But this compares with the combined 5 lakh crore rupees managed by the state-owned provident fund and pension fund and over 7.6 lakh rupees managed by Indian mutual funds. Under the NPS, every subscriber will have an individual pension account, which will be portable across job changes. The subscribers will get to choose fund managers and schemes to manage their pension wealth. They will also get to have the option of switching schemes and fund managers. NPS WILL ENHANCE GOVERNMENT`S LIABILITIES MORE One of arguments made by government in favour of NPS, that staggering pension liability under old defined benefits based pension scheme is not financially sustainable. But contrary to this claim, sixth Pay Commission report says that pensionnary expenditure in absolute terms would be significant but as a percentage of Gross Domestic Product (GDP) its share is on decline. In reality, this national pension system will rather swell the liability of government more as it has not only to contribute more than earlier - 10% of( basic pay +DA) now as against 10% basic pay earlier only- to the pension account of employees but also have to make pension payments towards existing pension holders under defined benefits based pension system. By making the pension scheme contributory for the new entrants the Government has hit them below the belt and has made a travesty of the post-retirement benefits for them. The payment of 10% basic wages and DA as contribution to the pension scheme virtually means reduction in their net wages. Historically, most companies have been computing provident fund (PF) contributions (at 12% each by the employer and employee) against basic salary and dearness allowance only .A recent contentious and dubious circular dated November 30, 2012 issued by the Employees Provident Fund Organisation - if implemented - will reduce the take home pay of salaried employees. The circular states that basic wages will include all allowances which are ordinarily, necessarily and uniformly paid to the employees. Thus, various allowances such as conveyance, educational allowance, medical allowance, etc., will have to be taken into consideration while computing the PF contribution. This, in turn, will mean a lower take home pay which will adversely affect present living standard. Another dangerous proposal is contemplated by government is that the retirement fund body Employee’s Provident Fund Organisation (EPFO)’s subscribers who are covered under Employees’ Pension Scheme-1995 (EPS-95) “may be asked even forced to join NPS with the same contribution. All these will have adverse affect on the other pension schemes prevailing in the country. .”The finance ministry has argued that NPS, which is self sustaining pension system, could be a good substitute for Employees Pension Scheme (EPS) and would be beneficial for subscribers as they would get decent returns and adequate pension wealth. But the return of EPS as indicative return on the fund managed under EPS, and then the annualised return for the period May 2009 to May 2013 will be 10.47 per cent, which on the face of it is higher than the return declared by NPS in its scheme for central government. It is also reported in a news item titled ‘National Pension Scheme funds hit by downturn`` by Babar Zaidi, ET Bureau, Sep 9, 2013,) the NPS funds for government employees have, on an average, lost 2.45% in the past year. Most of the losses are due to the steep 12-15% fall in government bond prices in the past three months. However, if present downturn in the equity market is considered, it will further reduced. SWINDLING OF PENSIONERS` MONEY WORLD WIDE During 2008-09 global meltdowns in the US, the savings of pensioners were lost in that country when the stock market crashed. This is not just a stray case, but one among millions of sufferers in the US where pension funds are invested in stock markets. United States is facing a pension crisis of unprecedented magnitude (pravada.ru04/08/2010. A dozens of large corporate pension plans either have collapsed or are on the verge of collapsing. Pension underfunding has been a persistent problem for corporate America for years (Jeff Cox, 31 Jul 2013). It turns out that the plans of S&P 500 companies are underfunded to the tune of $451.7 billion. A number of companies have tried to reach settlements with employees to reduce their obligations, a process known as de-risking. Similarly California pension funds close to bankruptcy (Kevin Martinez, 30 January 2009).The two largest pension funds in California, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), have lost billions of dollars in value. Not only in US, but most pension plans in other countries such as Canada are facing significant funding shortfalls.( By David W. Virtue, virtueonline.org ,July 29, 2013). .Investment returns are lower due to the economic downturn. The Anglican Church of Canadas General Synod Pension Plan is in danger of collapsing unless it gets immediate financial relief from the province of Ontario. Giant insurers in UK are routinely flouting new rules designed to protect customers who saved for their pensions from being left tens of thousands of pounds poorer.( RUUTH LYTHE in Mail online Aug 11, 2013).They play dirty tricks to con peoples into buying third-rate pension deals. Even, some of the best-known insurance firms are luring thousands into spending their retirement years in poverty by offering unsuitable deals and baffling them with jargon. ATTACK ON SOCIAL SECURITY .It is argued by Government and supporters that NPS is aimed at providing social security to millions of employees through efficient intermediation of long-term household savings. It will go a long way in increasing the coverage of formal pension and social security plans in India where only around 12 per cent of active workforce has any formal pension or social security plan. But the bitter truth is that the NPS is an attack on the social security of the employees which contains an evil design to privatise the pension Funds and lure foreign asset managers to run retirement funds. But it will enable the foreign capital to have greater access to our savings which will have cataclysmic impact on our economy. The decision of the government to allow unhindered access of the foreign companies to the pension fund through FDI in line with Insurance sector will further imperil pension prospect as many of those companies have infamy of looting pension fund in their own country and in tatter, disarray or insolvent. Hence, Pension will no more remain a secure social security; it will become a funding source for unscrupulous investors, both domestic and foreign, which will be used through speculative share market. The money that is being sought for infrastructure through these funds may possibly never come for the purpose except in some isolated cases. Even the repatriation of funds would be at a high level and will reduce the fund available for infrastructure.. The Fund managers appointed by the PFRDA will handle the fund not for charity but for their own profit. Fund manager will try to increase his profit at the expense of investors. Hence whatever return on pension fund investment that will reach the pensioner will be the net amount after ensuring profit of the fund managers as well . Further in the NPS, the investment risk is entirely borne by the employees. NPS doesn’t guarantee minimum assured return. Further, there will be no explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market-based guarantees. This rule differs from bank deposits, where deposits up to Rs 1 lakh are guaranteed.. However, the subscriber seeking minimum assured returns shall be allowed by fund managers to opt for investing his funds in such schemes notified by the Authority. But it does not specify the minimum amount of returns. For those who want to play it safe, schemes that invest wholly or predominantly in debt instruments such as corporate bonds or government bonds should be a good bet but return will be too low and negative if inflation is taken in to consideration. Hence, the hope of higher return, investors may be lured to invest in ‘glamorous’ equities where pension will be susceptible to the whims of speculators ,vagaries of share market and vicissitudes of the World economy. As a result of which due to extreme volatilities of our stock market one may end up accumulating low pension-funds which may provide meagre pension. It means the NPS would deprive its subscribers of their legitimate right and pension will be in peril under these schemes. CONCLUSION According to Wikipedia, the free encyclopedia, a pension is a contract for a fixed sum to be paid regularly to a person, typically following retirement from service. Pensions should not be confused with severance (job loss, dismissal/unemployment) pay; the former is paid in regular instalments, while the latter is paid in one lump sum. But National Pension System (NPS) without any assured returns will create insecurity in the mind of pensioners which will have devastating impact on their longevity of life. This nullifies the very purpose of pension which is regarded as a source of livelihood in twilight year. The pension is the legal right of employees and taking it away would amount to snatching their life at old age. The Supreme Court of India has held that pension is a deferred wage and the right of government servants’ .It is not a fund payable as per the government’s pleasure. The State has no power to withhold the same.. Moreover, upholding the Supreme Court’s opinion, the Sixth Pay Commission too has held that pension is a legitimate right of a government employee and cannot be withdrawn.. Hence, with the elderly likely to constitute a quarter of Indias population by 2050, there is need for a publicly-funded, universal scheme. The government of Sri Lanka withdrew a new Employee Pension Benefit Fund Bill on June 3 after massive protests by twenty six trade unions under the banner of the Joint Trade Union Alliance. The bill was designed to meet one of the International Monetary Funds conditions for a $US2.6 billion loan to Sri Lanka. Various trade Unions must take a clue from this struggle and lunch scathing attack on this nefarious motive of government to privatise pension fund with concomitant entry of FDI in pension sector to the detriment of nation`s interest. The author is an Odisha based Columnist and Economist. Email:skmohapatra67@gmail, Mobile-09437208762
Posted on: Wed, 19 Mar 2014 13:07:11 +0000