RESEARCH PAPER IN LABOUR LAWS II

Pensions in the Indian Public Sector

A CRITICAL STUDY OF NEED AND SUFFICIENCY

SUBMITTED BY: ARVIND SRINIVAS I.D. NO: 1555 IV YEAR, B.A., LL.B. (HONS.) DATE OF SUBMISSION: 16TH APRIL, 2012

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, BANGALORE

Table of Contents

I. Introduction India has nearly eighty million elderly people, which is one eighth of worlds elderly population. This segment of population is growing at a rate of 3.8% per annum as against a rate of growth of 1.8% for the overall population. A vast majority of this population is not covered by any formal old age income scheme and are dependent on their earnings and transfer from their children or other family members. These informal systems of old age income support are imperfect and are becoming increasingly strained. India does not have a comprehensive old age income security system. The Department of Pension & Pensioners' Welfare is the nodal department for formulation of policies relating to pension and other retirement benefits of Central Govt. employees covered under the CCS (Pension) Rules, 1972. Pension matters relating to State Governments are dealt with by the respective State Governments. For pension matters relating to employees of or rules and procedures governing these matters of Defence, Railways, Posts and Telecommunications reference has to be made to the relevant Ministries/Departments and organizations thereunder. The lack of a comprehensive system is resulting in the overlooking of several important issues such as the burden on public resources. This paper seeks to examine the Indian pension system as it currently exists. Before this examination, the paper first scrutinizes the need for pension. Post looking into the current structure of the system, this paper will enumerate the problems with the system and elaborate on them. Relief measures taken to alleviate these problems will be discussed and finally the question of sufficiency of the pension laws in India will be placed under the microscope.

II. The Need for Pension A. The Concept of Pension Before we deal with the pension system in India, it is necessary to appreciate the concept of pension. In Halsbury's Law of England1, it has been observed as follows: Pension means, a periodical payment or lump sum by way of pension, gratuity or superannuation allowance as respects which the Secretary of State is satisfied that it is to be paid in accordance with any scheme of arrangement having for its object or one of its objects to make provision in respect of persons serving in particular employments for providing them with retirement benefit. In India, there is a definition of pension in Article 366(17) of the Constitution, but the definition is not all pervasive. It is essentially a payment to a person in consideration of past services rendered by him. It is a payment to a person who had rendered services for the employer, when he is almost in the twilight zone of his life.2 B. Reasons for Granting Pension A political society which has a goal to set up a welfare state, would introduce as a welfare measure wherein the retiral benefit which is grounded on the consideration of the State's obligation to its citizens who having rendered service during the useful span of life must not be left to penury in their old age.3 Seen in the light of the present day notions pension is a term applied to periodic money payments to a person who retires at a certain age considered age of disability; payments usually continue for the rest of the natural life of the recipient. The reasons underlying the grant of pension vary from country to country and from scheme to scheme. Broadly stated they are: as compensation to former members of the armed forces or their dependents for old age, disability, or death from service causes, 1 Halsbury's Law of England, Fourth Edition, Reissue - Vol.16
2 Article 366: (17) pension means a pension, whether contributory or not, of any kind whatsoever payable to or in respect of any person, and includes retired pay so payable, a gratuity so payable and any sum or sums so payable by way of the return, with or without interest thereon or any other addition thereto, of subscriptions to a provident fund; 3 Kerala State Road Transport v. K.O. Varghese And Ors., AIR 2003 SC 3966

as old age retirement or disability benefits for civilian employees as social security payments for the aged, disabled or deceased citizens made in accordance with the rules governing social service programs of the country. As a continuing reward for service

Pensions under the first head are of great antiquity. Under the second head they have been in force in one from or another in some countries for over a century but those coming under the third head are relatively of recent origin, though they are of the greatest magnitude. C. Role of the Law The Supreme Court in D.S. Nakara v. Union of India4 observed as to what are the goals that any pension scheme seeks to subserve. A pension scheme consistent with available resources must provide that the pensioner would be able to live free from want with decency, independence and self-respect and at a standard equivalent at the pre-retirement level. This approach may attract criticism that if a developing country like India cannot provide an employee while rendering service a living wage, how can one be assured of it in retirement? It appears that in determining the minimum amount required for living decently is difficult, selecting the percentage representing the proper ratio between earnings and the retirement income is harder.5 The philosophy prevailing in a given society at various stages of its development profoundly influences its social objectives. The law is one of the chief instruments whereby the social policies are implemented and pension is paid according to rules which can be said to provide social security law by which it is meant those legal mechanisms primarily concerned to ensure the provision for the individual or a cash income adequate, when taken along with the benefit in kind provided by other social services (such as free medical aid) to ensure for him a culturally acceptable minimum standard of living when the normal means of doing so failed.6 D. Pension as a Right In State of Kerala and Ors. v. M. Padmanabhan Nair 7 , it was observed that pension and gratuity are no longer any bounty to be distributed by the Government to its employees on 4 D.S. Nakara v. Union of India, AIR 1983 SC 130
5 Id. 6 H. Calvert, Social Secruity Law, 2nd ed. [London: Sweet and Maxwell Ltd., 1978], p.1 7 State of Kerala and Ors. v. M. Padmanabhan Nair. AIR 1985 SC 356

their retirement but are valuable rights and property in their hands and any culpable delay in settlement and disbursement thereof must be visited with the penalty of payment of interest at the current market rate till actual payment. The view was reiterated in Dr. Uma Agrawal v. State of U.P. and Anr.8 E. Nature of Pension in the Indian Public Sector Pension to civil employees of the Government and the defence personnel as administered in India appear to be a compensation for service rendered in the past. However, as held in Dodge v. Board of Education9, a pension is closely akin to wages in that it consists of payment provided by an employer, is paid in consideration of past service and the purpose of helping the recipient meet the expenses of living. This appears to be the nearest to the Indian approach to pension with the added qualification that it should ordinarily ensure freedom from undeserved want.

8 Dr. Uma Agrawal v. State of U.P. and Anr,(1999) 3 SCC 438 9 Dodge v. Board of Education (1937 (302) US 74:82 Law Edn.58)

III. Existing Pension And Retirement Arrangements The existing arrangement of pension schemes can be broadly classified into the formal and informal sectors. The schemes in these sectors and the various sub classifications are mentioned below. A. Formal sector Formal sector pensions in India can be divided into three categories; viz those schemes that come under an Act or Statute, Government pensions and voluntary pensions. 1. Pensions under an Act i. Pensions under the Employees Provident Fund & Miscellaneous Provisions Act, 1952: Employees Provident Fund Employees Pension Scheme Employees Deposit Linked Insurance Scheme

ii. Pensions under the Coal Mines Employees Provident Fund & Miscellaneous Provisions Act, 1948: Coal mines provident fund Coal mines pension scheme Coal mines linked insurance scheme

iii. Gratuity under the Payment of Gratuity Act, 1972 2. Government Pensions Pensions for government employees would include employees of the central as well as the state governments: i. Central Government Pensions10 10 Administerd by the The Department of Pension & Pensioners' Welfare in accordance with the following
Rules and Acts: i. Central Civil Services (Pension) Rules 1972 ii. Central Civil Services (Commutation of Pension) Rules (1981) iii. Central Civil Services (Extraordinary Pensions) Rules iv. General Provident Fund (Civil Services) Rules 1960 v. Contributory Provident Fund (India) Rules 1962 vi. The Pension Act, 1871

Civil servants pensions Railways Defence Posts

A diagrammatic representation of the Indian Pension System

ii. State Government Pensions iii. Bank Pensions Reserve Bank of India (RBI) Public sector banks National Bank for Agriculture and Rural Development (NABARD)

3. Voluntary Pensions i. Superannuation schemes ii. Plans sold in the market iii. Mutual funds iv. Insurance firms B. Informal Sector Pensions The Department of Economic Affairs, Ministry of Finance, India has recently finalised a
vii. Payment of Arrears of Pension (Nomination) Rules, 1983

technical assistance project with the Asian Development Bank voluntarily participate in formal retirement plans. Informal Sector are: 1. Senior Citizens Saving Scheme 2. National Old Age Pension Scheme 3. Public Provident Fund

11

to formulate appropriate

policies and institutional arrangements to motivate informal sector excluded workers to Existing arrangements applicable to

11 See ADB Report titled India: Pension Reforms for the Unorganised Sector availabile at: http://www2.adb.org/Documents/Reports/Consultant/36346-IND/36346-02-IND-TACR.pdf

IV. Problems Related to Pension The problems with the current pension system is not to be found in the nitty gritties of the laws that govern them. Rather the problems are a result of the cropping up of larger issues which go beyond the confines of the legal sphere. If the problems relating to pension systems in the public sector are to be solved, then these issues have to be considered and take into account while modifying existing pension laws or while drafting a new law to govern these systems. Some of these issues are elaborated upon below. A. Population Aging Improvement in life expectancy and decline in fertility rate are leading to a significant change in the population age structure. The old age population (aged 60 years or more) has risen from about 19.8 million in 1951 to 79.7 million in 2011, resulting in an increase of the proportion of the elderly in the total population from 5.5 to 6.9 percent. According to the World Bank estimates, the percentage of old people is expected to rise further to 10.3% by 2020. In absolute terms, the number of elderly citizens is anticipated to nearly double between 1996 and 2016, from 62.3 million to 112.9 million12. B. Problems with Provident Funds The Indian provident fund system has many shortcomings, some of which are inherent to the schemes while others have emerged due to poor plan administration 13. In a provident fund system, the income replacement, investment and inflation risks are borne by the plan participants. According to the principles of social insurance, provident fund is not an ideal substitute for pension. the contingency. 15
14

The ILO argues that provident funds have serious limitations in

alleviating old age poverty because it does not provide protection against the whole length of

12 See R. Goswami, Indian Pension System: Problems and Prognosis, Lecture at Indian Institute of Management, Bangalore, available at www.pensions-research.org/papers/india/India%20Pension.pdf 13 U.R. Bhat, An Alternative to the PF Scheme, Economic Times, June 19 2000, available at http://www.etinvest.com/ettax/news/t19jun.htm 14 D. Vittas, Dimitri, M. Skully, Overview of contractual savings institutions, [Country Economics Dept., World Bank, Washington, 1991]. 15 Id.

C. Rising Financial Burden of Public Pension Schemes The rising number of retirees and the increasing generosity of the public pension programs are rapidly jeopardizing their long-term financial sustainability. Pension schemes of the central as well as various state governments are facing acute financial crisis due to lavish benefit provisions. For example, between 1995 and 1999, the pension expenditure by the central government has increased at an annual rate of 18 percent. The annual growth rate in pension expenditure for different states has varied between 22 and 34 percent in the corresponding period. It has been observed that unless the current system is adjusted, the public pension schemes will be financially unsustainable in the near future16. D. Government Control The current pension system is heavily regulated by government agencies. State control and interference in administration and supervision has only hindered the growth of the pension system. The government virtually controls all aspects of major retirement saving schemes like participation criteria, benefit entitlements, investment guidelines, etc. The conservative regulatory environment, leading to lack of transparency and public accountability, characterizes the present system. In recent years, there has been widespread recognition that the current regulations are impeding the growth of the pension system. Many claim that greater autonomy for the provident and pension funds, supported by an environment of prudential regulations, are essential for pension reform in India. Such a regulatory regime should enhance transparency and public accountability, enforce internationally comparable accounting and disclosure standards and develop superior record keeping facility. E. Issues with Public Assistance Schemes Finally, lack of formal old age income support for the financially impoverished classes, is another serious deficiency of the current system. For some time, the social assistance programs, administered at the state level, has remained the main apparatus for alleviating poverty among Indias elderly population.17

16 M.G. Asher, Reforming Indias Social Security System available at:

http://www.iief.com/Research/mukulasher1.pdf 17 S.K. Wadhawan, Social Security for Workers in the Informal Sector in India, ILO, Geneva. 1999

In recent years, however, the Central Government has significantly increased its involvement with these schemes. Still, the efficacy of these means-tested state pension programs is highly doubtful because of low coverage and meager benefit levels. The inefficiency in administration, as witnessed in a number of states, has further hampered these programs. It has been observed that these measures of support through public assistance schemes have been somewhat restrictive, minimal or cosmetic in their impact and approach, circumscribed as they are by a variety of limitations and constraints18.

18 Supra note 16.

V. Relief Measures In an effort to address the problematic aspects of the pension system in the public sector, the New Pension System has been put into place. The Pension Fund Regulatory and Development Authority Act that will formalise the system is still a Bill and has only recently been approved by the Cabinet which may result in the Bill being tabled in this session of Parliament. The 2012 Budget also tries to facilitate this reform. The salient features of the System, the Bill and the relevant parts of the Budget are discussed below. A. New Pension System (NPS) Introduced from 1st January, 2004 through a notification dated 22nd December, 2003 for new entrants to Central Government service, except to Armed Forces. The Government has constituted an interim regulator, the Interim Pension Fund Regulatory and Development Authority (PFRDA) through a Government Resolution in October, 2003 as a precursor to a statutory regulator. This Resolution was re-issued on 14th November 2008.19 The design features of the New Pension System (NPS) are self-sustainability, scalability, individual choice, maximising outreach, low-cost yet efficient, and pension system based on sound regulation. The National Securities Depository Limited (NSDL) has been selected as the Central Recordkeeping and Accounting Agency (CRA) by PFRDA and has commenced operation. PFRDA has appointed three pension fund managers, a custodian and a trustee bank. The accumulation and contribution of subscribers of NPS, who are Central Government Employees, are invested based on the investment guidelines prescribed for the non government provident funds by the Ministry of Finance. However, the investment guidelines for NPS for all citizens have been prescribed by PFRDA.20 NPS has also been extended to new segments (autonomous bodies, State Governments and unorganized sector) and introducing micro-pension initiatives. NPS has been adopted resoundingly by the State Governments. After receiving Governments approval for extending the NPS to all citizens including the unorganized sector workers PFRDA has rolled out the
19 See www.pfrda.org.in/indexmain.asp?linkid=84 20 See Business Standard, Everything you want to know about the New Pension Scheme, May 02, 2009, available at http://www.business-standard.com/india/storypage.php?autono=356860

NPS architecture for all citizens of the country on a voluntary basis from 1st May, 2009. In order to expand the reach of the NPS countrywide, Interim PFRDA appointed the Department of Posts as a POP.21 Under the Swavalamban Scheme, Government will contribute Rs. 1000 per year to each eligible NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12, 2012-13 and 2013-14. The benefit will be available only to persons who join the NPS with a minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.22 B. Pension Fund Regulatory and Development Authority Bill, 2011 Pension Fund Regulatory and Development Authority Bill, 2011 to be presented in parliament and recommendations of the standing committee to be considered. The PFRDA Bill, 2005 was introduced in the Lok Sabha in March, 2005 but lapsed with the dissolution of the 14 th Lok Sabha. The Bill was introduced in the Lok Sabha again on March 24, 2011. The Interim PFRDA was set up in 2003 and The New Pension System (NPS) was launched in 2004 as a compulsory scheme for all government employees and as a voluntary scheme for all citizens including those in the unorganized sector. Salient features of the Act are23: The Pension Fund Regulatory and Development Authority Bill, 2011 seeks to give statutory powers to the interim authority set up in 2003. It also alters the name of the New Pension System to National Pension System. NPS is a defined contribution scheme for all central government employees who joined after January 2004. It is implemented through a combination of retailers, pension fund managers, and a record keeper. It is different from existing pension schemes in the organised sector such as the EPS, and the GPF. Both the EPS and GPF are defined benefit schemes. Under the NPS, every subscriber will have an individual pension account, which will be portable across job changes. The subscribers will choose fund managers and schemes to manage their pension wealth. They will also have the option of switching
21 Supra note 19 22 Manual for Swavalamban, available at http://pfrda.org.in/writereaddata/linkimages/Manual %20Part_1619615681.pdf 23 Available at http://www.prsindia.org/uploads/media/PFRDA/Legislative%20brief%20-%20PFRDA%20%20Final.pdf

schemes and fund managers. The NPS was extended to all general citizens through central government notification in May 2009. The Bill provides a structure to plan for old age income security. However, it is optional for those in the unorganised sector. This differs from the system in countries such as the United States, which have a mandatory system to ensure that all persons have old age income security. In the NPS, the investment risk is entirely borne by the employees. They are no longer exposed to the risk of default by the government as was the case under the defined benefit system. There will be no explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market based guarantees. This rule is different from the case of bank deposits, where deposits up to Rs 1 lakh are guaranteed. The total corpus and number of enrolments to the NPS have been lower than expected. Recommendations have been made by different committees to the government to make efforts to popularise the scheme. C. Pension Related Provisions in the Budget 2012-13 The 2012-13 Budget seeks to take up the following measures with respect to pensions24: Pension Fund Regulatory and Development Authority Bill, 2011 to be passed Widow pension and disability pension raised from Rs. 200 to Rs. 300 per month The National Family Benefit scheme grant doubled Promoting Swavalamban Setting up of Infrastructure Debt Funds to tap the overseas markets for long tenor pension and insurance funds. Retired, senior citizens exempt from tax payments National Pension Schemes will be linked to Aadhar VI. Concluding Remarks The Indian pension system is passing through a crisis of confidence. The need for pension is as great as ever and the courts have even gone on to confer it the status of a right in lieu of that person giving up his best years for service in the public sector. The economic,
24 Available at www. indiabudget.nic.in/ub2012-13/bh/bh1.pdf

demographic and labor market trends of the current system are moving in troublesome directions. The problems that the system is confronting now are quite well known and include demographic aging, changing social mores, pressure on public finances, low returns from provident funds. In recent years, growing realization about these deficiencies has prompted the government to take reformatory steps to overcome these problems. However, most of these reforms are initiated in a piecemeal manner. The failure of such ad-hoc initiatives suggests that there are no shortcuts to address these problems. The policy makers, therefore, need to take a fresh view and develop new mechanisms to rejuvenate the pension system. A mix of policies like reliance on greater funding, relaxation of investment norms, encouraging private participation, enhancing system efficiency and developing regulatory capacity could help avert the looming pension crisis and promote better economic security for the aged. In this regard, the new pension system and the PFRDA Bill are a step in the right direction. These steps show that the law needs to focus at the larger issues at hand. The question of sufficiency of the laws is answered in the negative as these laws do not take into account the most important factors affecting the pension system. Most of them are fairly archaic and terribly shortsighted. The problem thus lies not in the formulation or wording of the laws, but in their total ignorance of several core issues. However there is some hope that the NPS and the PFRDA will address these issues satisfactorily.