Demographic changes in Europe
Pension has become a major socio-economic issue in Europe. In Europe, with the possible exception of UK and Netherlands, almost all countries face ‘pension under-funding crisis’. They identified the crisis as “fewer babies and longer lives” i.e. low birth rate and higher number of old people. French President Sarkozy’s plans to reform the nation’s state-run pension scheme made him the most unpopular President in the post war period, which ended with his overthrow. He just wanted to raise the retirement age from 60 to 62 in the short run and to 67 by 2018 so as to address the deficit ridden balance sheet of the country. France has an ageing population— women now expect to live up to 87, while male life expectancy is 85— coupled with a simultaneous drop in the birth rate. The demographic pyramid has been inverted, meaning that there are far more retirees than there are active workers who pay into the pension fund.
“Pension is a Right”
Nakara case of 1982 (DS Nakara and others Vs Union of India 1983-AIR-130-SC) is many a time considered landmark in the history of pension right. Every year 17th December, the day the judgement was delivered, is considered as ‘Pensioner’s Day’ by some. But even before Nakara case, another Constitution bench of the Supreme Court has already declared pension as a basic right of the pensioners. The Court recognised the plight of old age and declared that “Pension is a right”. The antiquated notion that no right to pension can be enforced through Court has been rejected by these judgements. Recently on 9-9-2008 also in a similar matter of equality the Supreme Court fully agreed with the decision given by Constitution Bench of the Supreme Court in DS Nakara case.
On the basis of the observations of the apex court in the ‘Nakara Case’, the Fifth Central Pay Commission observed that ‘pension is not in the nature of alms being doled out to beggars. The senior citizens need to be treated with dignity and courtesy befitting their age. Pension is their statutory, inalienable, legally enforceable right and it has been earned by the sweat of their brow. As such it should be fixed, revised, modified and changed in ways not entirely dissimilar to the salaries.” So, pension hike is linked to rise in salaries.
Now the question of managing public and private pensions differently has come up. Controversial PFRDA Bill that attempt to reform the pension in Government sector and PF related pension reforms in the private sector (including PSUs) are being hotly discussed as deciding factors for crores of pensioners in the country.
World Bank model of “Five Pillars”
Recent Pension reforms in India and the PFRDA Bill are an outcome in line with the World Bank pension model that is thought in the background of the European experience. World Bank has distinguished the entire pension systems under a “multi-pillar system” and the direction in which all the pillars should transform. World Bank suggests a combination of five basic components in the multi-pillar system. Broadly they are:
1.“Zero pillar” (universal social pension- that provides a minimal level of protection) which is non-contributory. This is a basic pillar to deal more explicitly with the poverty objective. It also involves a mandated, unfunded, and publicly managed defined benefit system.
2.“First-pillar” or contributory system that is linked to varying degrees to earnings, and seeks to mitigate some portion of income. It is a mandated, funded, and privately managed defined-contribution scheme.
3.“Second pillar” that is essentially a mandatory, individual voluntary retirement savings account scheme.
4.“Third-pillar” is voluntary arrangements that can take many forms (individual, employer sponsored, defined benefit, defined contribution). They are essentially flexible and discretionary in nature.
5.“Fourth pillar”- It is a nonfinancial informal intra-family system to include broader context of social policy, such as family support, access to health care, and housing.
The First pillar (about universal pension) and last pillar are later additions by the World Bank. Variance in defining the pillars and different terminologies are seen in different documents of World Bank. For a variety of reasons, World Bank suggests a system that incorporates as many of these elements as possible. Pension reforms always demand to move away from the single-pillar design. Which pillar will come to serve which category of pensioners, is guided by the bargaining capacity of the pensioners. This is one area where trade unions come into operation.
Pay-go Vs Pre-funding
Of all the pension reforms experimented the major one appealing to Governments who are poor in budget management is shifting from the pay-as-you-go scheme (PAYG- unfunded defined benefit) towards a pure defined contribution Scheme. Some of the countries which have gone in for this pension reform are Chile, Sweden, Poland, Mexico, Australia, Hungary and Kazakhstan. Indian Government is more attracted by the Chilean Pension reform scheme in particular, as per an article prepared by the Ministry of Finance on the Pension.
Second Central Pay Commission (1957-58) recommended that if in future any improvement is to be made in the non-contributory retirement benefits, these benefits should be on a contributory basis.
PFRDA Bill – A shift towards Contributory Pension
New Pension System in the PFRDA Bill introduced for new entrants to Central Government Service w.e.f. 1st January 2004 proposes Defined Contributory Pension Scheme instead of the existing non-contributory Defined Benefit Scheme. The Scheme shall be regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA). Government’s PFRDA scheme is being implemented in banking sector also. Employee is to contribute 10 per cent of Pay and DA to the said fund. In Banks it is being made applicable to those joining as employees or officers on or after 1.4.2010. There shall be no separate Provident Fund for new employees.
The PFRDA Bill was introduced in a haste by the Government. Whereas the unorganised Workers Social Security Fund is neglected by the Government as it cannot benefit the industrial lobby. The main reason stated in the reply by Finance Ministry on the question of haste shown by it in moving the Bill is: “Survey which was conducted on behalf of the Finance Ministry said 20 million people are willing to join the new pension system.” This proved to be a lie when almost all organisations representing the covered employees have opposed the new Bill. PFRDA Standing Committee Report said: “Escalating costs of the pension system has compelled the Government to have a re-look at the formal programmes that provide social security to employees.”
Reformers talk about “balance between publicly and privately administered pensions” and “responsible investing (in the share market!)”. The IRDA Committee recommended for reforms in the non-governmental/unorganised sector as follows: “Establish a system based on privately managed, individual funded defined-contribution accounts. Freedom to invest in equities must be ensured and such a facility leads to a tremendous enhancement over a long period of time, to the returns.” The financial crisis has shown that all the world over, people especially pensioners lost their lifelong savings in the speculative market gambling. Government of India has not learnt lessons from what had happened to lakhs of pensioners in US and European countries when their pension funds were invested in private funds and stock market. It had ended in social calamity from which their societies have not so far recovered.
Objection by BMS
Bharatiya Mazdoor Sangh strongly opposed the move of the Finance Ministry to pass the “anti worker” Pension Fund Bill (PFRDA). The Government of India is trying to snatch away the existing privileges of employees having the benefit scheme and converting it into a contributory insurance scheme at the expense of the employees, thereby exonerating the liability of employers including the Government. Now Pension will be virtually converted into a return from individual private investment.
The new channel of corruption being created in the name “PPP model” is prompting Government officials and Ministers to canvas publically for private sector at the cost of common man’s investments. BMS has told Government to protect employees and not to cater the interest of private investors and speculative market. Government has fallen into the hands of big industrial lobby and instead of protecting the interest of millions of employees it facilitates back door entry to foreign investors in the large area of Pension Funds. Finance Ministry is facilitating a big business for private industries at the expense of workers. It is fundamentally wrong for the Finance Ministry to trespass into workers issues which is basically for the Ministry of Labour to take care of on well established principles and norms. Hence BMS demanded the Government to stop forthwith the presentation of Bill in the Parliament.
Employees Pension Scheme (EPS)-1995
Under Employees Provident Fund Act 1952, a Family Pension Scheme (FPS) was introduced with effect from 1-3-1971. Later Government of India introduced a pension scheme w.e.f. 16-11-1995 in place of family pension scheme, 1971. In the said EPS-95 of EPFO, the amount of pension is very low, as the contribution to this fund is very low from Government. Some workers are getting as low as Rs 12 as pension under this scheme after contributing large amount for long period such as 10 years. It is to be noted that even BPL family members are getting Rs 200 to Rs 1500 as old age and handicapped pension under social security provisions without contributing anything to the fund. But the PF subscribers are getting such a poor amount as Pension. In practice, according to the data available 35 lakh pension holders were up to March 2011 out of which 14 lakhs were drawing less than Rs 500 per month. The Parliamentary Standing Committee on Labour in its Report No. 39 in February 2009 submitted to the Parliament recommended that the Government contribution to this Pension Fund should not be less than 50 per cent of the Employers’ contribution. But the Government is giving only 1.16 per cent and that too from the last Family Pension Scheme. BMS has demanded minimum pension of Rs 3000 linked with VDA per month.
Siphoning PF money to Private Fund Managers
Till two years back, EPFO reserve funds were managed by State Bank of India. Suddenly in spite of stiff opposition from trade union members of PF Trust Board especially BMS representatives, Government had appointed private fund managers to manage the large EPF funds and to break the monopoly of SBI. BMS delegates in CBT have opposed inclusion of these private fund managers and demanded that public sector banks and LIC be involved to manage the EPFO funds. BMS also feels that Government has due to an unholy alliance, purposely done this in order to help big corporates. The representatives of INTUC and HMS had given their consent for private fund managers to manage funds.
Further when benefits under EPS were being withdrawn one by one in the name of losses, BMS opposed it and launched signature campaign at national level demanding restoration of the withdrawn benefits. Later a memorandum along with signatures was submitted to Rashtrapatiji. BMS and its CBT members also made several suggestions to improve the scheme. With the intervention of Rashtrapati Bhawan, the Labour Ministry stopped further withdrawal of benefits. The Ministry constituted an Experts Committee to consider the following suggestions.
1.Increase in minimum pension
2.Increase of rate of contribution of employers and Government towards Employees’ Pension Scheme, 1995
3.Grant of Additional Relief regularly
4.Increase in the maximum salary limit
5.Pension at par with Central Government
6.Restoration of provisions of Communication and Return of Capital
7.DA to pensioners linked with cost of index
This is a success on the efforts being made by BMS in this regard. Since Government has not moved further seriously, BMS has decided to go on nationwide agitation on August 1, 2012.
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