Labour 2 Final

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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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