The Cabinet decisions to allow FDI in pension funds on a par with the insurance sector and to approve amendments in the pension Bill have few takers among Central government employees.
ON October 4, the Union Cabinet gave the go-ahead for the introduction of certain official amendments to the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011. On the face of it, the decisionapparently taken on the basis of the recommendations of the Standing Committee on Financeseems to be in favour of the pension subscriber, but employees organisations and trade unions feel otherwise. All Central government employees have decided to go on a nationwide strike on December 12 in protest against the reforms.
The PFRDA Bill owes its genesis to a series of announcements in the Union Budgets from 2001 up to 2004 when the idea of pension reforms for Central government employees and organised sector workers rapidly gained currency. Subsequently, the government introduced the New Pension System (NPS) and made it mandatory for all Central government employees who joined after January 1, 2004, except those in the armed forces. The NPS essentially shifted pension schemes from the defined benefit system to the defined contribution system.
The Bill was initially introduced in the Lok Sabha in March 2005. Among its provisions was one that gave statutory powers to the interim Pension Fund Regulatory and Development Authority established in 2003. The Bill lapsed with the dissolution of the 14th Lok Sabha. The NPS remained in place even without the statutory regulatory mechanism. As many as 27 State governments and Union Territories adopted the NPS. Among the exceptions were the Left-ruled West Bengal, Kerala and Tripura, who continued with the defined benefit system.
In July 2009, the United Progressive Alliance (UPA)-II government extended the NPS to all self-employed people and others in the unorganised sector. And in the Union Budget of 2010, the government introduced the Swawalamban Scheme, a co-contributory pension scheme.
On March 24, 2011, the government introduced the pension Bill again in the Lok Sabha, which then referred it to the Standing Committee on Finance. The committee gave its report in August that year. The Cabinet decision of October 4 allowing, in effect, 49 per cent foreign direct investment (FDI) in the sector echoes the recommendations of the committee. In fact, while the UPA takes credit for introducing the NPS, it was the National Democratic Alliance (NDA) government that introduced, in August 2003, the proposal to implement a new restructured defined contribution pension system for new entrants in the Central government service as announced in the Union Budget of 2003.
The NPS now has 37.45 lakh subscribers and a corpus of Rs.20,535 crore. Pension as a social security scheme covers only 12 per cent of the working population in the country today. Extending it to all citizens may be a lofty idea, but Central government employees have opposed the NPS from day one. We are opposed to FDI in pension outright. If FDI enters pension, then fund managers will invest wherever they want and our funds will be available for global investment. It will be FDI in reverse direction. When the PFRDA Bill was announced, the reason touted by the government was that a contributory pension scheme was necessary due to a greater outflow [of funds on account of pension liability], said K.K.N. Kutty, secretary general of the Confederation of Central Government Employees & Workers. Pension is financed by new recruits. Between 2001-2009 itself, employment levels in government came down, thereby reducing the total inflow.
Employees oppositionThe main argument for the contributory pension scheme is that it will reduce substantially the outflow on account of pension liability. The major pension liability was incurred by the armed forces personnel, but they were excluded from the scheme, said K.K.N. Kutty.
He quotes a study by K. Gayatri of the Centre for Economic Studies and Policy of the Institute for Social and Economic Change, Bangalore, that government liability on account of the contributory pension scheme would in effect increase during the next 34 years, from Rs.14,284 crore to Rs.57,088 crore, and taper off thereafter. The governments pension liability in 2004-05 was 0.51 per cent of the gross domestic product. Of this, 0.26 per cent was accounted for by defence personnel.
Kutty also said that even though existing pensioners were not covered under the new scheme, the government was free to abrogate any agreement and bring everyone under the NPS. The PFRDA Bill, he said, stipulated that there would not be any explicit or implicit assurance of benefit other than a market-based guarantee. This exposed the subscriber to market shocks.
On November 25, 2011, the Confederation in a letter sought Prime Minister Manmohan Singhs intervention in scrapping the PFRDA Bill. It said that in the eventuality of any market shock, the subscriber to the NPS would end up with no ability to purchase an annuity; and that as annuity could not be cost indexed, the real worth would always fall due to inflationary pressures. It further argued that the subscriber, in this case the civil servant, having to make the choice of investment portfolio as per the scheme was most likely to end up making the wrong choices.
The pension fund, above all, would be made available to stock market operations, which was not only unethical but a blatant diversion of public funds for private profit, both foreign and Indian, the letter said. By enforcing the NPS, it said, the government had created two categories of civil servants and exposed one section to the vagaries of the market with an undefined annuity. There was no guaranteed minimum pension for those who were covered under the NPS, while civil servants under the existing scheme got both a defined and guaranteed minimum pension and upon his/her death the family members were entitled to pension.
In their representations to the Standing Committee, most of the trade and employees unions had opposed the contributory pension system and the provisions of the PFRDA Bill on the grounds that they sought to deprive government employees of their old-age security guarantee in the form of a statutory pension that was indexed to inflation.
Pressure from industryNot surprisingly, industry experts and chambers of commerce support the pension reform measures and the establishment of the PFRDA. The principal argument of both the government and industry was that the defined pension scheme for civil servants consumed an alarming proportion of Central and State government revenues and had become unsustainable. Their argument was that social assistance schemes did not reach the poorest.
The Sixth Pay Commission set up in 2006 a committee to look into the financial implications on account of the increasing number of pensioners and suggest alternative funding methodology. This committee concluded that the existing systems of pension are increasingly becoming complicated after the introduction of the NPS and warned that caution has to be exercised in initiating any further reforms.
The Cabinet, however, cited the recommendations of the standing committee to justify its decision. But employees fear that the subscriber will have no say in deciding where funds should be invested and the quantum of pension funds that can be withdrawn and when. The decision of where to invest is circumscribed by a predetermined set of schemes recommended by the PFRDA.
For instance, the very first recommendation of the standing committee that the Cabinet accepted was that the subscriber seeking minimum assured returns would be allowed to invest his/her funds in such schemes providing a minimum assured returns as may be notified by the Authority. The problem is that the schemes are predetermined by the PFRDA and may not necessarily ensure proper returns nor be indexed to price increases.
Again, the PFRDA will determine the frequency, purpose and limits of withdrawal of fund by a subscriber. One of the proposed amendments to the Bill is that the subscriber cannot withdraw from his individual pension account more than 25 per cent of the contribution. The standing committee had recommended a certain amount of flexibility under the NPS to enable subscribers to withdraw money for unforeseen and urgent expenses. It had also recommended that subscribers be given the option of 100 per cent investment of pension funds in government securities. Neither of these two concerns was considered by the Cabinet. The additional worry now is the Cabinet approval of FDI in the pension sector. Simultaneously, it has approved the setting up of a vibrant Pension Advisory Committee, with representatives of all major stakeholders to advise the PFRDA on matters of framing regulations under the Act.
All over the world, because of the downturn, there has been a cutback in expenditures, including on pensions. Workers are going on strike on these very issues. It is laughable to expect that with FDI in pension, the poor people of this country will benefit. Rather than an inflow, there will be an outflow of funds out of this country, said Tapan Sen, Rajya Sabha member of the Communist Party of India (Marxist). Sen is the general secretary of the Centre of Indian Trade Unions (CITU). Significantly, the Cabinet did not consider several recommendations of the standing committee. One of them is about the selection of pension fund managers; the committee had recommended that one-third of all fund managers should be from the public sector. The Cabinet overruled this by saying that the PFRDA had stipulated that only one of the pension fund managers would be from the public sector, which was a floor-level criterion, and that the ceiling could be based on objective criteria.
The committee also had recommended a comprehensive legislation to cater to the social security needs for people in the unorganised sector. On FDI, the standing committee was supportive but said the decisions relating to FDI in the pension sector and deployment of pension funds outside the country should not be in variance with the related provisions applicable to the insurance sector. It also recommended that the representatives of employees organisations and subscribers be co-opted in the special committees to be set up by the Authority. While capping FDI in the pension sector at 26 per cent, the committee cautioned that spelling out the foreign investment policy in the pension sector clearly in the PFRDA Bill will be more in the fitness of things, as the pension fund managers holding the stake of the old age income security of their clients cannot be compared with other agencies/companies/institutions in the financial sector. It recommended that any decision relating to permitting FDI in the pension sector should be implemented only by way of bringing forward suitable amendments in the present legislation.
The amendments now require parliamentary assent. Some of the UPAs allies have not been supportive of FDI and may not support it in the pension and insurance sector. The Bharatiya Janata Party, on the other hand, is opposed to FDI, but is supportive of the PFRDA Bill and the NPS. The Left alone will probably remain opposed to the PFRDA, the NPS as well as the latest move to introduce FDI in the pension sector.
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