Agonising Contributory Pension Scheme

Discontent is simmering among the government employees and teachers over the Contributory Pension Scheme that was launched in 2003 by the then NDA government. The united Andhra Pradesh government and later the Telangana State governments have also adopted the scheme.

Initially the protests were muted as it did not impact them. But, as the government recruitments continued after 2004, the ranks of government employees denied the defined benefit pension and brought under this contributory pension scheme started to swell. They are realising its ill-effects on them.

In the old pension scheme, government employees were getting pension as an additional post-retirement benefit. But, the new scheme provides for pension based on the contributions from the employees and the income accrued in a fund set up for the purpose. The pension funds will be invested in the stock market and the quantum of pension is therefore subject to its vagaries. The lives of the retirees would therefore swing as per the bulls and bears of capital market.

In the old scheme, the pension benefit was defined and calculated based on the last drawn pay. Apart from this defined pension, the retired employees in the old scheme would also get other benefits like gratuity and commutation. Hence, the anger over the new pension scheme.
The new pension scheme is investment centric and not social security or social insurance centric.

The policy of pension reforms emerges out of the World Bank report titled, ‘Averting the Old Age Crisis’. This report advocated pension sector reforms. The essence of the World Bank report was not to tackle the crisis faced by the elderly in their old age as professed in the title of the report but to resolve the ‘crisis’ of the pension pay out burden of the governments world over.

In the old pension scheme, the amount was essentially dependent on the maximum wage one reaches by the time of retirement. The other benefits like gratuity, commutation availed in the old pension scheme are non-taxable but 60 per cent withdrawals at the time of retirement under the new pension scheme are subject to taxation.

The section 20(2)(g) of PFRDA Act inter-alia, provides: “there shall not be any implicit or explicit assurance of benefits except market based guarantee mechanism”. Even the government is not going to benefit much as it has to contribute 10 percent as a matching grant. It is not therefore relieved of the pension burden.

However, the industry gets access to massive public savings at the cost of social security of millions of government employees. Under this new pension scheme, the employees will not get any family pension facility. Besides, service charges will be collected from the employees for managing their pension funds.

The apex court in D S Nakara & Others vs. Union of India, 1982, stated that pension is a right; not a bounty or gratuitous payment. Pension also has a broader significance in that it is a social-welfare measure rendering socio-economic justice by providing old-age economic security to those who toiled ceaselessly in their youthful heyday. Privatising pension funds tantamount to privatising social security and depriving the protective freedom enjoyed by the employees, who contributed to the government service for decades.