People's Democracy

PENSION FUND REGULATORY AUTHORITY

 Resist This Retrograde Move Towards Privatisation Of Pensions

W R Varada Rajan

ON December 30, 2004, the Government of India issued an ordinance paving the way for setting up of the Pension Fund Regulatory and Development Authority. It has now introduced a Bill to replace the Ordinance in Lok Sabha on March 21, 2005, amidst a protest walk out by the left parties.

THE NDA ‘LEGACY’

This move by the present UPA government signifies that it has decided to go ahead with the establishing of a pension fund authority, in pursuit of the NDA government move to switch over to a defined contribution scheme for the employees recruited since January 2004. This departure from the earlier defined benefit scheme had met with opposition from not only the organisations of the central and state government employees but also the Central Trade Unions, right from the time of NDA dispensation.

The NDA regime had planned to tinker with whatever little social security pension protection is available in the country to at least the organised sector workers. It had religiously followed the prescriptions of the World Bank report titled “Averting the Old Age Crisis”, which advocated  ‘pension sector reforms.’ The thrust of the World Bank report was not to tackle the crisis faced by the elderly in their old age but to resolve the ‘crisis’ of the pension pay out burden of the governments world over, which have been operating pension schemes of different types. Almost all such schemes were ‘defined benefit’ schemes, operated on a ‘Pay As You Go (PAYG)’ basis.

The NDA regime had also commissioned the following three reports to ‘dole’ out ‘pension sector reforms’ prescriptions: 1) Project OASIS (expert committee) Report (December, 1999); 2) Insurance Regulatory and Development Authority (IRDA) Report on  ‘pensions reforms in the unorganised sector’ (October 2001) and 3) Government of India High Level Group on New Pensions System (Bhattacharya) Report (February 2002).

The ‘Project OASIS’ Report of the Dave committee, set up by the ministry of social justice and empowerment, mooted this proposal for a separate pension authority for the first time. The tripartite Central Board of Trustees of the Employees Provident Fund had, in a special meeting held on February 8, 2000 under the chairmanship of the then labour minister, unanimously held: “the (said) report is investment centric and not social security or social insurance centric and contains a number of recommendations and suggestions, which are inconsistent with the ground reality or practical considerations.” The CBT was “unanimously of the opinion that the proposals in the report … would seriously jeopardise the safety and future savings of the workers as well as the whole concept of social security and social insurance.”

In October 2001, the Insurance Regulatory and Development Authority (IRDA), set up in the wake of opening of the insurance sector to private and foreign players, came out with yet another report titled Pension Sector Reforms for Unorganised Sector. This report, inter alia, mooted proposals for a new pension fund regime accompanied by a self-serving recommendation to nominate the IRDA as pension regulator. 

It is important to note that both the above reports espousing the need for a pension regulatory authority had framed their proposals on a ‘voluntary’ tier comprising individual retirement accounts.

Later, however, the NDA regime decided to discontinue the defined benefit pension scheme applicable to the government employees and constituted a High Level Group on New Pensions System (headed by Shri Bhattacharya) to recommend a new ‘contribution defined’ pension scheme. The report of this group recommended a new pension scheme with contributions from the employees and the government for the new recruits in government service. The NDA regime introduced a new scheme effective from January 1, 2004, together with setting up of an interim pension fund authority.

Even the Bhattacharya Committee, it is to be noted, did not recommend only a ‘defined contribution’ scheme, which is the case with the New Pension System. It recommended a hybrid DB/DC or mixed scheme. It recommended a mandatory first tier with contributions from the employee and matching contribution from the government at 10 per cent of pay and DA. It also prescribed a voluntary second tier with a minimum contribution of 2 per cent but without any upper limit. Here again, the government was required to match the contribution by the individual employee up to a 5 per cent limit. The report also provided: “The first tier Pension will be a defined benefit at 50 per cent of the average emoluments over the last 36 months of the working career of the employee. The minimum number of years of qualifying service for eligibility to pension would be 20 years and pension will be paid on superannuation at the age of 60 years. Full pension shall be payable for a qualifying service of 33 years for a person superannuating at the age of 60 years.”

NEW PENSION SYSTEM

However, the NDA government, while notifying the New Pension System on December 22, 2003 and effective from January 1, 2004, did not conform to the recommendations of the Bhattacharya Committee even. The notification proposed:

Defined contribution based mandatory tier I scheme where the new entrant to the central government will make a monthly contribution of 10 per cent of the salary and dearness allowance (DA), which will be matched by the central government.

An optional tier II withdrawable account in the absence of the facility of General Provident Fund (GPF). The government is to make no contribution to this account. (No details of how and where the contributions to this account will be invested have been spelt out.)

The new system to is have a central record keeping and accounting infrastructure and several fund managers to offer three options. Under option ‘A’, investment will be predominantly in fixed income instruments and some investment in equity. Under option ‘B’, there will be greater investment in equity. Option ‘C’ implies equal investment in fixed income and equity instruments.

At the time of exit, it is mandatory for the employees to invest 40 per cent of ‘pension wealth’ is to purchase an annuity to provide for lifetime pension for the employee and his dependant parents and spouse. Remaining 60 per cent of ‘pension wealth’ to be paid in lump sum at the time of exit.

The Pension Fund Regulatory and Development Authority will regulate and develop the pension fund market.

UPA GOVT MOVE

This was incorporated by the UPA government in the Economic Survey 2003 – 04 and formed part of the Budget speech of the finance minister last year.

The Pension Fund Regulatory And Development Authority (PFRDA) Ordinance/Bill, which the UPA regime seeks to actively pursue now, faithfully adheres to the above parameters.

It defines the “New Pension System” as “the contributory pension system referred to in Section 20 whereby contributions from a subscriber are collected in an individual pension account using points of presence and a central record keeping agency and accumulated by pension funds for pay offs as specified by regulations.”

Section 20, inter-alia, provides: “there shall not be any implicit or explicit assurance of benefits except market based guarantee mechanism to be purchased by the subscriber’ and ‘a subscriber shall not exit from the New Pension System except as specified by the central government by notification.” The latter implies that even upon exit form government service, the subscriber will not be allowed to exit from the New Pension System before attaining the age of 60 years.

Again, the statement of objects and reasons appended to the Bill states, “The NPS is mandatory for new recruits to the Central Government services (except to the armed forces in the first stage)”. This has ominous portents in view of the (NDA) government having included in the terms of reference to the Bhattacharya Committee to ‘explore the option of moving existing employees to a contributory system’. Even the decision not to make it mandatory to the new recruits to the armed forces is a limited period option confined to the first stage. The Dave Committee and the IRDA reports had already mooted proposals for migration of the Public Provident Fund (PPF) subscribers, employees of the Exempted Establishments under the EPF Act etc. to the Individual Retirement Account concept. The Dave Committee, IRDA and Bhattacharya Committee reports have also extensively commented on carrying out reforms in the Employees Provident Fund Organisation as well, which all are pointers to a total transition, albeit in phases, to a defined contribution individual retirement account plan of social security.

TUs NOT CONSULTED

The UPA government had, in its National Common Minimum Programme, committed firmly ‘that labour-management relations in our country must be marked by consultations, cooperation and consensus, not confrontation’ and to actively pursue ‘tripartite consultations with trade unions and industry on all proposals concerning them’. The present ordinance on PFRDA – and the subsequent Bill – has been resorted to without any consultations with the trade unions, in a blatant violation of this commitment.

It is reportedly argued that the New Pension System concerns only the government employees and therefore there is no need to involve the central trade unions. It is also being stated that the New Pension System had been discussed in the Joint Consultative Machinery (JCM) for the Central government employees.

Both these contentions are questionable. All the three reports (cited above) on Pension Sector Reforms have in different ways advocated the switch over to “Individual Retirement Account’ system of social security for all segments of the working force in India. So, the threat perceptions emanating from the move towards a PFRDA looms large before all sections of workers in the country and the central trade unions have a vital stake in this regard.

Even in the JCM for the central government employees, the report of the Bhattacharya Committee was never placed for discussion. It is understood that the report itself had not been made public. In the meeting of the Standing Committee of the JCM held on January 30, 2004 itself the staff side raised this issue stating that the provisions of the new contributory pension scheme was a matter of concern to the central government employees.

Again, the staff side had proposed an item captioned ‘withdraw new contributory pension scheme’ (Item No. 17) for discussion in the national Council meeting of the JCM slated for April 16, 2005.

Another important point to be noted here is that the vast sections of the employees of the state governments, who also are likely to be impacted by the New Pension System, were at no stage involved in any consultation process.

OMINOUS PORTENTS

The move towards setting up of a Pension Fund Regulatory Authority has dangerous implications. It is intended to flag off retrograde move towards privatisation, which has three main thrust areas viz. I) Switching over to the “Defined Contributions” concept from that of “Defined Benefits” concept; ii) Shifting to personal and social insurance schemes from social assistance schemes and iii) Diverting the social security funds from the debt (government and other securities) market to equity (share) market. These recipes are also brandied as moves aimed at “identifying the appropriate mix of public sector-private sector participation in social security.” This is a totally erroneous and dangerous move, as the private sector seeks to participate in social security only eyeing the huge corpus of private pension funds that could be generated, which could be diverted to the equity market in the country.

This is also accompanied by two other retrograde moves. One – a change in the tax treatment for contributions to the pension scheme, shifting from the EEE formula, where the moneys were exempt from taxation at all three stages of contribution, accruals and withdrawal (of terminal benefits), to the EET formula where the terminal benefits will be taxed at the applicable rates in the year of receipt. The budget 2004 – 05 carried this announcement. The Budget 2005 – 06 has envisioned opening up the pension sector for Foreign Direct Investments (FDI), which means a green signal for foreign corporates to garner the huge pension funds for their speculative hunt for profits.

DEFEAT THE MOVE 

It is therefore imperative for the entire trade union movement to stoutly oppose the Pension Fund Regulatory And Development Authority (PFRDA) Ordinance/Bill in totality and resist its legislation. The walk out from Lok Sabha by the left parties, signalling their opposition to the PFRDA at the introductory stage of the relevant bill, has set the stage for a countrywide resistance struggle by all sections of workers.

The present fiscal related problem cited by the government for the unsustainability of the present Pay As You Go (PAYG) pension scheme is of its own making. The present pension scheme was introduced in the past as a substitute to the then existing Contributory Provident Fund Scheme, to which the central government had been making a matching contribution. It was replaced by the General Provident Fund with only the contribution by the employees and in lieu of its matching contribution, the central government brought in place the present pension scheme. Even the Fifth Central Pay Commission had recommended retention of the present pension scheme. The government, over the past years, merrily used up the funds, which were due on the erstwhile contributory provident fund scheme and failed to make any provision for an appropriate funding arrangement in place for meeting the pension liability towards its employees. For this the employees cannot be penalised as is being resorted to now.

The trade union movement must unitedly demand the UPA government to drop this retrograde move and to address the basic and more fundamental issues related to social security or the widely talked about ‘social safety net’, for the entire work force in the country, including those in vast the unorganised sector.