ONE RANK, ONE PENSION DILEMMA

By Ashit K Sarkar – Retd Sr VP –HR, Britannia Industries Ltd.

[email protected] Cell: +91 9972012382

 

 


BACKGROUND: Till about 1930, most employees in any private organization in India had low levels of job security, and uncertain service conditions. It was hoped or expected that employees would save from their earnings during the work life to provide for their old age, or that the children or other family members would take care of them - the joint family system helped.

 

Labour welfare legislations during early pre and post independence derive their origin partly from the social security vision of independent India's leaders and their perception of past injustice to the labour, and from the Indian Constitution and also international conventions of the ILO. Such legislations, including toward's Retiral Benefits, were enacted keeping in mind the international practices and standards on Human Rights, and United Nations protocols.

 

RETIREMENT BENEFITS – PROVIDENT FUND & GRATUITY: In the absence of any social security in India, it was realized that there was a need to provide for financial assistance post retirement as a condition for service. With this objective the Employees Provident Fund Organization was introduced in 1952 and Gratuity Act in 1972. The employer was statutorily required to provide for a substantial part of the contribution as a part of service conditions, for which tax exemptions were provided.

 

PENSION SCHEMES:  Additionally, following the practice followed by most good international organizations, some Companies as a part of service terms offered contributory or non-contributory Pension schemes to their management staff. Tax exemptions for the contributions made to such funds were permitted within specified limits. The Trust Funds had to be approved by the statutory authority for this tax benefit. It may be noted that for private companies pensions are paid through the LIC of India annuities.

 

Pension schemes are either "Defined Benefit (DB)" type or "Defined Contribution (DC)" type.  In the former DB scheme, the monthly Pension is computed as a proportion of the Final Salary, and the years of service, and often on the death of the pensioner the spouse or children are also eligible to limited pensions.  For DC, the annual contributions made during the career of each member along with the interest are used to purchase an annuity as the eligible pension. With increasing inflation, lower interest rates and increasing Salaries, the contributions needed for DB schemes are uncertain, and are generally substantially greater as compared to that required for DC schemes and have to be computed by Actuarial evaluation periodically, and any shortfall has to be met through Additional contributions, based on Accounting Standard 15 laid down by the Institute of Chartered Accountants of India.

 

Whilst the above broadly applies to the Private sector employees, some of the Central & State Government employees (including the armed forces) are similarly eligible to pensions under different schemes (both DB & DC) as applicable, and under the New Pension Scheme introduced recently in 2004 – which is a DC scheme.  Pensions are paid directly from the Government funds.  In their cases, the periodic DA adjustments apply to the pensions and as such additional funds have to be released by the government with each increase.

 

ONE RANK, ONE PENSION (OROP):  This revival of the past practice for armed forces withdrawn in 1973 consequent to the Third Central Pay Commission decision to conform with civil pension scheme, has been the demand of the armed forces personnel for several years, and calls for "same pension for same rank and same length of service irrespective of the date of retirement."  The parliamentary Koshyari Committee found merit and recommended it in 2011, which has also been agreed by various political parties, including the past and the present Prime Ministers, but has still not been implemented, due to various unstated reasons. This issue has become very prominent of late with escalating peaceful agitation by ex-servicemen and undue harsh actions of the police. The 'fast unto death' has made the issue critical that requires quicker decision.   Recently the Railway employees have similarly demanded OROP, as also the Central Para-military forces and others groups or staff are bound to follow.  It must be noted that OROP is a DB type of pension scheme with latest Salaries being used instead of the retiring final salary.

 

However, having already committed to OROP for the armed forces personnel, possibly without sufficient and careful study now there is no going back, and the sooner the Government implements this plan the better. It has to be realized that this delay and indecision is resulting in affecting the morale of the highly loyal and disciplined armed forces, which at the time of any urgency or need are always at the forefront to save the nation. Unfortunately, this issue has become a political issue from the initial requirement of rectifying what was seen an error. Further, the agitation tended to become almost a trade union type of action rather than the honour of the veterans issue, and the stand became insisting on meeting every point demanded, and not accepting anything less by many, despite the main OROP for the armed forces being finally granted at a cost of Rs 10,000+ crores annually (that the tax payer citizen will have to pay) just prior to Bihar elections - even if some sections remained dissatisfied. The payments will be effective from July 1st, 2014.

 

With differing Salary structures and service conditions of different departments of the millions strong State and Central government staff, and DA adjustments periodically, it is an extremely complex task to equitably deal with each group, more so as merit and performance yardsticks vary and are most difficult to implement with any evenness for many external considerations - that all are well known. Costs of retiral benefits have to be included as a part of the total compensation system, and therefore any changes for any group unilaterally will result in further distortion that need to be very carefully balanced in a long term plan for all groups affected. Unconditional OROP to all as a necessary condition of service or a benefit is not at all a feasible solution for several reasons, main one being the huge galloping future financial cost. Since there is no 'one salary for one rank' during the service period it is impossible to result in OROP at the time of retirement - since salary and service determines the eventual pension. There are several other reasons - both 'for' and 'against' introducing OROP, including changes in jobs/organizations, early or voluntary decision to retire etc. Another factor is its validity for those who get alternative employment being fit and able. This factor particularly applies to armed forces personnel, who have options of early retirement, and then often get employed in the Public or Private sector, whilst also drawing their full and adjusted pensions.  

 

However, the Government and the future Pay Commissions whilst reviewing the service conditions of all may consider method of increasing pensions periodically, even if OROP is not possible. With ever-rising prices, DA and Salaries, there is no doubt that past pensioners who retired with lower Salaries resulting in lower pensions do need to be taken care of to some extent in the future.  In this context any pension improvement is a very good and desirable direction, and may be incorporated as a part of future term improvements for all, to the extent feasible. We have to keep in mind that the vast majority of the population neither have any social security, nor any pension at the end of their service life, leave aside periodic improvements! Of course, the MP's have ensured themselves with a minimum pension of Rs 20,000 monthly for just 5 years service with Rs 1,500 increase for each additional year - besides all other types of benefits!  

 

The private sector past retired employees have no such possibility since the payments are made from limited contributions made to the Funds earlier based on lower salaries. Consequently, those who retired before 2000 get a fraction of the pensions of present retirees with similar ranks and service - whether in DB or DC schemes (since Salaries remained highly restricted till then, as per government regulations). Their pensions do similarly need to be taken care of with periodic pension improvements that very few provide. This will necessitate improving the viability of the Pension Funds by the employers through increased contributions.   The tax relief available for contributions to Pension Funds or directly buying the additional annuity from LIC for such pensioners needs to be relaxed for providing this benefit that may urge the employers to carry out such improvements – especially for those at lower levels of pension.  Tax and other policies need to be supportive to this change.