A novel social security scheme

WOULDN'T YOU like to be a member of a social security scheme which asks for only a small monthly contribution from you and, in return, provides you life and accident insurance cover, pays the hospital and treatment bills in case of illness, gives you compensation for the salary lost during the sick period and also pays you a bonus every year?

Of course, you would. But is there such a dream scheme? Yes - the Scheme for Assistance to Families in Exigency (SAFE) - in operation at the Department of Space (DoS) for the last one and a half years.

No, there is no accounting trick or financial sleight-of-hand involved, says Mr. R. P. Sahu of the ISRO Satellite Centre, Bangalore, an IIT (Kharagpur) alumnus and principal architect of the scheme. The only `trick' involved is that the scheme takes advantage of Clause 23AAA in Section 10 of the Income-tax Act, which provides for exemption from income tax on any income received by any person on behalf of a fund established for the welfare of employees or their dependents and of which fund such employees are members. This Clause became applicable from assessment year 1996-97 onwards.

The DoS employees are already protected, under Government rules, by two social security schemes : (1) Group Insurance Scheme (GIS), wholly funded by employee subscription and comprising life insurance cover plus a savings element; and (2) Contributory Health Service Scheme (CISS) which provides medical expense coverage and is co-funded by the employee as well as the Department of Space.

But these official schemes left several unfulfilled social security needs such as risk coverage against loss of job due to total permanent disability (except in case of accidents), compensation for loss of pay due to prolonged illness, meeting of non-medical expenses in case of serious or prolonged illness and the like. Moreover, the GIS was initiated in 1982 and the insurance amount had not kept up with inflation and higher income of DOS employees since then.

What SAFE has been designed to do, says Mr. Sahu, is to bridge these gaps at little extra cost to the employee and no cost to the Department. It has well defined and easily understood conditions for disbursal of benefits to avoid discretion and arbitrariness. The basic concept of SAFE is to provide low-cost risk coverage with incidental savings being the by-product. For example, a contribution of only Rs. 50 a month provides financial assistance in exigency (FAE) of Rs. 1.50 lakhs in case of death or permanent disability. An equivalent LIC policy would entail a much heavier premium. Readers may be intrigued about this vast difference in costs. The secret is in the running expenses involved. In the LIC, management expenses account for nearly 25 per cent of the annual premium income, whereas, the first year's operation of SAFE shows that running expenses are only 1 per cent of the annual income from contributions.

A higher rate of contribution begets a higher rate of FAE. A residual bonus amount is calculated for each contributor at the end of a financial year, taking into account the residual bonus at the end of the previous year, the contribution during the financial year and any FAE that has been paid (see Figure 1). SAFE has been formulated for ease of operation with minimal staff and facility to enable full computerisation.According to Mr. Sahu, SAFE has several innovative features such as:

* It is inflation indexed since a member's contribution is a percentage of the basic pay plus DA. The FAE also keeps up with inflation since FAE is proportional to contribution.

* There is high flexibility in terms of level of contribution and choice of coverage.

* Family members (children below 25 years of age and spouse) can be included as beneficiaries.

* Total permanent disability due to any cause, not just accident, is covered.

* Loss of eyes/limbs is covered.

* Compensation for loss of pay due to prolonged sickness is available.

* Payment of lumpsum amount to cover non-medical expenses in case of serious and prolonged illness is a unique feature of SAFE.

SAFE has been promoted by the Vikram A Sarabhai Trust (VAST), an autonomous, non-profit but financially independent institution established in December 1997 for addressing specific social security gaps felt by DoS personnel. SAFE has now been in operation since December 1, 1998 and the financial highlights of the first year make interesting reading:

Income: Rs. 86.6 lakhs including Rs. 83.6 lakhs from contributions and Rs. 3 lakhs by way of interest of Rs. 3 lakhs.

Expenditure: Rs. 25.7 lakhs including FAE Rs. 24.2 lakhs, running expenses Rs. 1.4 lakhs and residual bonus Rs. 8,096. Surplus: Rs. 60.9 lakhs.

The annual contributions received and FAE disbursals are likely to double in the next 2 or 3 years as more DoS employees join SAFE. So far around 7,500 of the total employee strength of 16,500 have joined the scheme.

Mr. Sahu is confident that a scheme such as SAFE can be implemented in other large organisations and is willing to lend a helping hand to those interested. Social security is a sorely felt need in India. He has the following suggestions for enabling more such schemes to proliferate across the country:

(1) Expand the scope of Section 10 ( 23AAA) of the Income-tax Act to include groups other than employers' organisations such as professional bodies, trade unions and cooperative societies and

(2) The contribution to trusts recognised under the above clause can be made eligible for tax rebate on par with premia paid to LIC and GIC.

N. N. Sachitanand

in Bangalore

Send this article to Friends by E-Mail

Section  : Business
Previous : G-7 lists 15 potential havens
Next     : Competition law in perspective