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RESEARCH PAPERINLLABOURABOUR LLAWSAWSIIII
Pensions in the Indian Public SectorPensions in the Indian Public Sector
A CA CRITICALRITICAL SSTUDYTUDYOFOF NNEEDEEDANDAND SSUFFICIENCYUFFICIENCY
SUBMITTED BY: ARVIND SRINIVAS
I.D. NO: 1555
IV YEAR, B.A., LL.B. (HONS.)
DATEOF SUBMISSION: 16TH APRIL, 2012
NATIONAL LAW SCHOOLOF INDIA UNIVERSITY, BANGALORE
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Table of Contents
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I.
Introduction
India has nearly eighty million elderly people, which is one eighth of worlds elderly
population. This segment of population is growing at a rate of 3.8% per annum as against a
rate of growth of 1.8% for the overall population. A vast majority of this population is not
covered by any formal old age income scheme and are dependent on their earnings and
transfer from their children or other family members. These informal systems of old age
income support are imperfect and are becoming increasingly strained.
India does not have a comprehensive old age income security system. The Department of
Pension & Pensioners' Welfare is the nodal department for formulation of policies relating to
pension and other retirement benefits of Central Govt. employees covered under the CCS
(Pension) Rules, 1972. Pension matters relating to State Governments are dealt with by the
respective State Governments. For pension matters relating to employees of or rules and
procedures governing these matters of Defence, Railways, Posts and Telecommunications
reference has to be made to the relevant Ministries/Departments and organizations thereunder.
The lack of a comprehensive system is resulting in the overlooking of several important issues
such as the burden on public resources.
This paper seeks to examine the Indian pension system as it currently exists. Before this
examination, the paper first scrutinizes the need for pension. Post looking into the current
structure of the system, this paper will enumerate the problems with the system and elaborate
on them. Relief measures taken to alleviate these problems will be discussed and finally the
question of sufficiency of the pension laws in India will be placed under the microscope.
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II.
The Need for Pension
A. The Concept of Pension
Before we deal with the pension system in India, it is necessary to appreciate the concept of
pension. In Halsbury's Law of England1, it has been observed as follows:
Pension means, a periodical payment or lump sum by way of pension, gratuity or
superannuation allowance as respects which the Secretary of State is satisfied that it is to be
paid in accordance with any scheme of arrangement having for its object or one of its objects
to make provision in respect of persons serving in particular employments for providing them
with retirement benefit.
In India, there is a definition of pension in Article 366(17) of the Constitution, but the
definition is not all pervasive. It is essentially a payment to a person in consideration of past
services rendered by him. It is a payment to a person who had rendered services for the
employer, when he is almost in the twilight zone of his life.2
B. Reasons for Granting Pension
A political society which has a goal to set up a welfare state, would introduce as a welfare
measure wherein the retiral benefit which is grounded on the consideration of the State's
obligation to its citizens who having rendered service during the useful span of life must not
be left to penury in their old age.3 Seen in the light of the present day notions pension is a
term applied to periodic money payments to a person who retires at a certain age considered
age of disability; payments usually continue for the rest of the natural life of the recipient. The
reasons underlying the grant of pension vary from country to country and from scheme to
scheme. Broadly stated they are:
as compensation to former members of the armed forces or their dependents for old
age, disability, or death from service causes,
1 Halsbury's Law of England, Fourth Edition, Reissue - Vol.16
2 Article 366:(17) pension means a pension, whether contributory or not, of any kind whatsoever payable to or in
respect of any person, and includes retired pay so payable, a gratuity so payable and any sum or sums so
payable by way of the return, with or without interest thereon or any other addition thereto, of subscriptionsto a provident fund;
3 Kerala State Road Transport v. K.O. Varghese And Ors., AIR 2003 SC 3966
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as old age retirement or disability benefits for civilian employees
as social security payments for the aged, disabled or deceased citizens made in
accordance with the rules governing social service programs of the country.
As a continuing reward for service
Pensions under the first head are of great antiquity. Under the second head they have been in
force in one from or another in some countries for over a century but those coming under the
third head are relatively of recent origin, though they are of the greatest magnitude.
C. Role of the Law
The Supreme Court in D.S. Nakara v. Union of India4 observed as to what are the goals that
any pension scheme seeks to subserve. A pension scheme consistent with available resourcesmust provide that the pensioner would be able to live free from want with decency,
independence and self-respect and at a standard equivalent at the pre-retirement level. This
approach may attract criticism that if a developing country like India cannot provide an
employee while rendering service a living wage, how can one be assured of it in retirement? It
appears that in determining the minimum amount required for living decently is difficult,
selecting the percentage representing the proper ratio between earnings and the retirement
income is harder.5
The philosophy prevailing in a given society at various stages of its development profoundly
influences its social objectives. The law is one of the chief instruments whereby the social
policies are implemented and pension is paid according to rules which can be said to provide
social security law by which it is meant those legal mechanisms primarily concerned to ensure
the provision for the individual or a cash income adequate, when taken along with the benefit
in kind provided by other social services (such as free medical aid) to ensure for him a
culturally acceptable minimum standard of living when the normal means of doing so failed. 6
D. Pension as a Right
In State of Kerala and Ors. v. M. Padmanabhan Nair7 , it was observed that pension and
gratuity are no longer any bounty to be distributed by the Government to its employees on
4 D.S. Nakara v. Union of India, AIR 1983 SC 130
5Id.6 H. Calvert, Social Secruity Law, 2nd ed. [London: Sweet and Maxwell Ltd., 1978], p.1
7 State of Kerala and Ors. v. M. Padmanabhan Nair. AIR 1985 SC 356
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their retirement but are valuable rights and property in their hands and any culpable delay in
settlement and disbursement thereof must be visited with the penalty of payment of interest at
the current market rate till actual payment. The view was reiterated in Dr. Uma Agrawal v.
State of U.P. and Anr.8
E. Nature of Pension in the Indian Public Sector
Pension to civil employees of the Government and the defence personnel as administered in
India appear to be a compensation for service rendered in the past. However, as held in Dodge
v. Board of Education9, a pension is closely akin to wages in that it consists of payment
provided by an employer, is paid in consideration of past service and the purpose of helping
the recipient meet the expenses of living. This appears to be the nearest to the Indian approach
to pension with the added qualification that it should ordinarily ensure freedom from
undeserved want.
8 Dr. Uma Agrawal v. State of U.P. and Anr,(1999) 3 SCC 438
9 Dodge v. Board of Education (1937 (302) US 74:82 Law Edn.58)
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III.
Existing Pension And Retirement Arrangements
The existing arrangement of pension schemes can be broadly classified into the formal and
informal sectors. The schemes in these sectors and the various sub classifications are
mentioned below.
A. Formal sector
Formal sector pensions in India can be divided into three categories; viz those schemes that
come under an Act or Statute, Government pensions and voluntary pensions.
1. Pensions under an Act
i. Pensions under the Employees Provident Fund & Miscellaneous Provisions Act, 1952:
Employees Provident Fund
Employees Pension Scheme
Employees Deposit Linked Insurance Scheme
ii. Pensions under the Coal Mines Employees Provident Fund & Miscellaneous Provisions
Act, 1948:
Coal mines provident fund
Coal mines pension scheme
Coal mines linked insurance scheme
iii. Gratuity under the Payment of Gratuity Act, 1972
2. Government PensionsPensions for government employees would include employees of the central as well as the
state governments:
i. Central Government Pensions10
10 Administerd by the The Department of Pension & Pensioners' Welfare in accordance with the followingRules and Acts:
i. Central Civil Services (Pension) Rules 1972ii. Central Civil Services (Commutation of Pension) Rules (1981)
iii. Central Civil Services (Extraordinary Pensions) Rules
iv. General Provident Fund (Civil Services) Rules 1960v. Contributory Provident Fund (India) Rules 1962vi. The Pension Act, 1871
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Civil servants pensions
Railways
Defence
Posts
A diagrammatic representation of the Indian Pension System
ii. State Government Pensions
iii. Bank Pensions
Reserve Bank of India (RBI)
Public sector banks
National Bank for Agriculture and Rural Development (NABARD)
3. Voluntary Pensions
i. Superannuation schemes
ii. Plans sold in the market
iii. Mutual funds
iv. Insurance firms
B. Informal Sector Pensions
The Department of Economic Affairs, Ministry of Finance, India has recently finalised a
vii. Payment of Arrears of Pension (Nomination) Rules, 1983
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technical assistance project with the Asian Development Bank 11 to formulate appropriate
policies and institutional arrangements to motivate informal sector excluded workers to
voluntarily participate in formal retirement plans. Existing arrangements applicable to
Informal Sector are:
1. Senior Citizens Saving Scheme
2. National Old Age Pension Scheme
3. Public Provident Fund
11 See ADB Report titled India: Pension Reforms for the Unorganised Sector availabile at:http://www2.adb.org/Documents/Reports/Consultant/36346-IND/36346-02-IND-TACR.pdf
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IV.
Problems Related to Pension
The problems with the current pension system is not to be found in the nitty gritties of the
laws that govern them. Rather the problems are a result of the cropping up of larger issues
which go beyond the confines of the legal sphere. If the problems relating to pension systems
in the public sector are to be solved, then these issues have to be considered and take into
account while modifying existing pension laws or while drafting a new law to govern these
systems. Some of these issues are elaborated upon below.
A. Population Aging
Improvement in life expectancy and decline in fertility rate are leading to a significant change
in the population age structure. The old age population (aged 60 years or more) has risen from
about 19.8 million in 1951 to 79.7 million in 2011, resulting in an increase of the proportion
of the elderly in the total population from 5.5 to 6.9 percent. According to the World Bank
estimates, the percentage of old people is expected to rise further to 10.3% by 2020. In
absolute terms, the number of elderly citizens is anticipated to nearly double between 1996
and 2016, from 62.3 million to 112.9 million12.
B. Problems with Provident Funds
The Indian provident fund system has many shortcomings, some of which are inherent to the
schemes while others have emerged due to poor plan administration13. In a provident fund
system, the income replacement, investment and inflation risks are borne by the plan
participants. According to the principles of social insurance, provident fund is not an ideal
substitute for pension. 14 The ILO argues that provident funds have serious limitations in
alleviating old age poverty because it does not provide protection against the whole length of
the contingency. 15
12 See R. Goswami, Indian Pension System: Problems and Prognosis, Lecture at Indian Institute of
Management, Bangalore, available atwww.pensions-research.org/papers/india/India%20Pension.pdf
13U.R. Bhat, An Alternative to the PF Scheme,Economic Times, June 19 2000, available athttp://www.etinvest.com/ettax/news/t19jun.htm
14 D. Vittas, Dimitri, M. Skully, Overview of contractual savings institutions, [Country Economics Dept., WorldBank, Washington, 1991].
15 Id.
http://www.pensions-research.org/papers/india/India%20Pension.pdfhttp://www.pensions-research.org/papers/india/India%20Pension.pdfhttp://www.pensions-research.org/papers/india/India%20Pension.pdf -
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C. Rising Financial Burden of Public Pension Schemes
The rising number of retirees and the increasing generosity of the public pension programs are
rapidly jeopardizing their long-term financial sustainability. Pension schemes of the central as
well as various state governments are facing acute financial crisis due to lavish benefit
provisions. For example, between 1995 and 1999, the pension expenditure by the central
government has increased at an annual rate of 18 percent. The annual growth rate in pension
expenditure for different states has varied between 22 and 34 percent in the corresponding
period. It has been observed that unless the current system is adjusted, the public pension
schemes will be financially unsustainable in the near future 16.
D.Government Control
The current pension system is heavily regulated by government agencies. State control and
interference in administration and supervision has only hindered the growth of the pension
system. The government virtually controls all aspects of major retirement saving schemes like
participation criteria, benefit entitlements, investment guidelines, etc. The conservative
regulatory environment, leading to lack of transparency and public accountability,
characterizes the present system.
In recent years, there has been widespread recognition that the current regulations are
impeding the growth of the pension system. Many claim that greater autonomy for the
provident and pension funds, supported by an environment of prudential regulations, are
essential for pension reform in India. Such a regulatory regime should enhance transparency
and public accountability, enforce internationally comparable accounting and disclosure
standards and develop superior record keeping facility.
E. Issues with Public Assistance Schemes
Finally, lack of formal old age income support for the financially impoverished classes, is
another serious deficiency of the current system. For some time, the social assistance
programs, administered at the state level, has remained the main apparatus for alleviating
poverty among Indias elderly population.17
16 M.G. Asher,Reforming Indias Social Security System available at:http://www.iief.com/Research/mukulasher1.pdf17 S.K. Wadhawan, Social Security for Workers in the Informal Sector in India, ILO, Geneva. 1999
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In recent years, however, the Central Government has significantly increased its involvement
with these schemes. Still, the efficacy of these means-tested state pension programs is highly
doubtful because of low coverage and meager benefit levels. The inefficiency in
administration, as witnessed in a number of states, has further hampered these programs. It
has been observed that these measures of support through public assistance schemes have
been somewhat restrictive, minimal or cosmetic in their impact and approach, circumscribed
as they are by a variety of limitations and constraints 18.
18 Supra note 16.
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V.
Relief Measures
In an effort to address the problematic aspects of the pension system in the public sector, the
New Pension System has been put into place. The Pension Fund Regulatory and Development
AuthorityAct that will formalise the system is still a Bill and has only recently been approved
by the Cabinet which may result in the Bill being tabled in this session of Parliament. The
2012 Budget also tries to facilitate this reform. The salient features of the System, the Bill and
the relevant parts of the Budget are discussed below.
A. New Pension System (NPS)
Introduced from 1st January, 2004 through a notification dated 22nd December, 2003 for new
entrants to Central Government service, except to Armed Forces. The Government has
constituted an interim regulator, the Interim Pension Fund Regulatory and Development
Authority (PFRDA) through a Government Resolution in October, 2003 as a precursor to a
statutory regulator. This Resolution was re-issued on 14th November 2008.19
The design features of the New Pension System (NPS) are self-sustainability, scalability,
individual choice, maximising outreach, low-cost yet efficient, and pension system based on
sound regulation. The National Securities Depository Limited (NSDL) has been selected as
the Central Recordkeeping and Accounting Agency (CRA) by PFRDA and has commenced
operation. PFRDA has appointed three pension fund managers, a custodian and a trustee bank.
The accumulation and contribution of subscribers of NPS, who are Central Government
Employees, are invested based on the investment guidelines prescribed for the non
government provident funds by the Ministry of Finance. However, the investment guidelines
for NPS for all citizens have been prescribed by PFRDA.20
NPS has also been extended to new segments (autonomous bodies, State Governments and
unorganized sector) and introducing micro-pension initiatives. NPS has been adopted
resoundingly by the State Governments. After receiving Governments approval for extending
the NPS to all citizens including the unorganized sector workers PFRDA has rolled out the
19 See www.pfrda.org.in/indexmain.asp?linkid=8420 SeeBusiness Standard, Everything you want to know about the New Pension Scheme, May 02, 2009,
available at http://www.business-standard.com/india/storypage.php?autono=356860
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NPS architecture for all citizens of the country on a voluntary basis from 1st May, 2009. In
order to expand the reach of the NPS countrywide, Interim PFRDA appointed the Department
of Posts as a POP.21
Under the Swavalamban Scheme, Government will contribute Rs. 1000 per year to each
eligible NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12,
2012-13 and 2013-14. The benefit will be available only to persons who join the NPS with a
minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.22
B. Pension Fund Regulatory and Development Authority Bill, 2011
Pension Fund Regulatory and Development Authority Bill, 2011 to be presented in parliament
and recommendations of the standing committee to be considered. The PFRDA Bill, 2005 was
introduced in the Lok Sabha in March, 2005 but lapsed with the dissolution of the 14 th Lok
Sabha. The Bill was introduced in the Lok Sabha again on March 24, 2011. The Interim
PFRDA was set up in 2003 and The New Pension System (NPS) was launched in 2004 as a
compulsory scheme for all government employees and as a voluntary scheme for all citizens
including those in the unorganized sector.
Salient features of the Act are23:
The Pension Fund Regulatory and Development Authority Bill, 2011 seeks to give
statutory powers to the interim authority set up in 2003. It also alters the name of the
New Pension System to National Pension System.
NPS is a defined contribution scheme for all central government employees who
joined after January 2004. It is implemented through a combination of retailers,
pension fund managers, and a record keeper. It is different from existing pension
schemes in the organised sector such as the EPS, and the GPF. Both the EPS and GPF
are defined benefit schemes.
Under the NPS, every subscriber will have an individual pension account, which will
be portable across job changes. The subscribers will choose fund managers and
schemes to manage their pension wealth. They will also have the option of switching
21 Supra note 19
22 Manual for Swavalamban, available at http://pfrda.org.in/writereaddata/linkimages/Manual
%20Part_1619615681.pdf23 Available at http://www.prsindia.org/uploads/media/PFRDA/Legislative%20brief%20-%20PFRDA%20-
%20Final.pdf
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schemes and fund managers.
The NPS was extended to all general citizens through central government notification
in May 2009. The Bill provides a structure to plan for old age income security.
However, it is optional for those in the unorganised sector. This differs from the
system in countries such as the United States, which have a mandatory system to
ensure that all persons have old age income security.
In the NPS, the investment risk is entirely borne by the employees. They are no longer
exposed to the risk of default by the government as was the case under the defined
benefit system.
There will be no explicit or implicit guarantee on the pension wealth, except in cases where
the subscriber purchases market based guarantees. This rule is different from the case of bank
deposits, where deposits up to Rs 1 lakh are guaranteed. The total corpus and number of
enrolments to the NPS have been lower than expected. Recommendations have been made by
different committees to the government to make efforts to popularise the scheme.
C. Pension Related Provisions in the Budget 2012-13
The 2012-13 Budget seeks to take up the following measures with respect to pensions24:
Pension Fund Regulatory and Development Authority Bill, 2011 to be passed
Widow pension and disability pension raised from Rs. 200 to Rs. 300 per month
The National Family Benefit scheme grant doubled
Promoting Swavalamban
Setting up of Infrastructure Debt Funds to tap the overseas markets for long tenor
pension and insurance funds.
Retired, senior citizens exempt from tax payments
National Pension Schemes will be linked to Aadhar
VI.
Concluding Remarks
The Indian pension system is passing through a crisis of confidence. The need for pension is
as great as ever and the courts have even gone on to confer it the status of a right in lieu of
that person giving up his best years for service in the public sector. The economic,
24 Available at www. indiabudget.nic.in/ub2012-13/bh/bh1.pdf
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demographic and labor market trends of the current system are moving in troublesome
directions. The problems that the system is confronting now are quite well known and include
demographic aging, changing social mores, pressure on public finances, low returns from
provident funds. In recent years, growing realization about these deficiencies has prompted
the government to take reformatory steps to overcome these problems. However, most of
these reforms are initiated in a piecemeal manner. The failure of such ad-hoc initiatives
suggests that there are no shortcuts to address these problems.
The policy makers, therefore, need to take a fresh view and develop new
mechanisms to rejuvenate the pension system. A mix of policies like
reliance on greater funding, relaxation of investment norms, encouraging
private participation, enhancing system efficiency and developing
regulatory capacity could help avert the looming pension crisis and
promote better economic security for the aged. In this regard, the new
pension system and the PFRDA Bill are a step in the right direction. These
steps show that the law needs to focus at the larger issues at hand. The
question of sufficiency of the laws is answered in the negative as these
laws do not take into account the most important factors affecting the
pension system. Most of them are fairly archaic and terribly shortsighted.
The problem thus lies not in the formulation or wording of the laws, but in
their total ignorance of several core issues. However there is some hope
that the NPS and the PFRDA will address these issues satisfactorily.
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