| Even though its Left allies were against any kind of pension reforms, the UPA could well have passed the Pension Bill with the help of the BJP, but since it thinks it gains political mileage by treating the BJP as a pariah, it chose to refer the Bill to the standing committee ""while UPA spokespersons have said this will just delay the Bill a bit, it is obvious pension reforms have suffered a serious setback since the Bill is now likely to undergo all manner of changes. |
| It is an unhappy coincidence, but the real solid blow to the current pension system was dealt by none other than Dr Manmohan Singh when he was the country's finance minister and it is under his tenure as Prime Minister that the attempt to fix it is being scuttled. |
| While the UPA decision that the Employees Provident Fund (EPF) give a 9.5 per cent return to members for 2004-05 will cause a problem since EPF investments don't yield such high returns, the real problem with the Employees Provident Fund Organisation (EPFO) is not the EPF since, by law, it cannot dip into its reserves to make the payment. |
| The real problem with the EPFO is the Employees Pension Scheme (EPS), begun by Dr Singh, which promises to pay members roughly half their last year's salary as pension. Since this was drawn up at a time when interest rates were roughly double what they are today, the EPFO already has a shortfall of around Rs 19,000 crore (which translates to around Rs 3,000 crore in today's prices) on account of the EPS. |
| The Pension Bill, which proposed the setting up of a regulator and the introduction of private pension players, would have helped fix things since new pension players would, as they do in the rest of the world, also invest part of their funds in the stock market as also in corporate debt, and therefore offer better returns""this would then take some burden off the EPFO as new entrants to the scheme would get limited. This process is now on hold. |
| What has also been put on hold are two other important changes. Till January last year, neither the government nor its employees contributed to a monthly provident fund, but the government paid a pension equal to half the last salary drawn to retired employees""pension payments rose from around Rs 5,000 crore in 1996-97 to Rs 20,000 crore today. |
| If, on the other hand, both the government and the employees contributed 10 per cent of the salary each year to a provident fund (PF), even with fairly moderate assumptions, the government would end up saving several thousand crores each year. So, a new pension scheme was drawn up for new employees from January 1, 2004, but this has now been put on hold. |
| A good way to see the impact of this is to use the toolkit provided by the Invest India Foundation, an organisation working on pension reforms, and track people who enter the government service today over a 35-year period till retirement. |
| The toolkit has details of the salary structure of government employees from the last pay commission and allows you to build up various investment scenarios (all investments in gilts, all in equity, half in gilts, 40 per cent in corporate bonds, 10 per cent in equity, and so on). |
| If you invest 60 per cent of the PF contributions in G-Secs and assume they give you a 2 per cent real return over 35 years, 30 per cent in corporate bonds with a 3 per cent real return, and 10 per cent in equity with a 6 per cent real return, the toolkit shows that the employee gets a survivor annuity of Rs 22,500 per month on retirement, which is comparable with the current pension received by bureaucrats. |
| If, however, a more reasonable assumption is made and only 40 per cent is invested in G-Secs, 35 per cent in private corporate bonds and 25 per cent in equity (most private pension players will go in for something like this, unlike the EPFO, which does zero equity and very little corporate bonds), this goes up to Rs 27,500. |
| Interestingly, if you apply this to the total size of the bureaucracy today, the government's contribution will be Rs 40,500 crore over 35 years, a figure which is less than what it paid out in pensions in the last three years alone! Without the new Pension Bill, however, this won't happen and the government pension bill will continue to soar. |
| The other issue put on hold is equally serious. Till some months ago, the EPFO had a plan to modernise itself, and this was partly driven by the need to be able to compete with the services provided by private pension funds once they came in. |
| This involved having double-entry book-keeping, for instance, up-to-date records (today, individual PF records do not need to be updated for up to 18 months), and a unique PF number for members. |
| While this has been put on the back-burner, the EPFO has already begun detecting irregularities that can only increase if the organisation is not modernised. A large number of individual PF accounts, for instance, have a negative balance today "" theoretically impossible, this has happened because loans have been taken against presumed balances in the PF account while the actual accounts haven't been updated. |
| Indeed, while the government has not moved on the proposals to fix the EPS by making its benefits less generous, a serious fraud is just waiting to happen. |
| Under Section 11(3) of the EPS, the monthly pensionable salary is capped at Rs 5,000 per month, but there's a caveat "" if this is suddenly hiked, in the last year of service, for instance, and a contribution made to the EPS at the higher salary, the pensionable salary will now be the higher salary. |
| Imagine the huge fraud possible if employers enter into a deal with employees near their retirement and suddenly hike salaries! And yet the UPA has chosen to put all pension reforms on hold. |
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