The Hindu : Pension scheme for new Govt. staff okayed

Online edition of India's National Newspaper
Sunday, Aug 24, 2003

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Pension scheme for new Govt. staff okayed

By Our Special Correspondent

NEW DELHI AUG. 23. All Central Government employees who joined service after October 2002, excluding the defence forces, would now be covered under a contributory pension scheme. Under this scheme, approved by the Union Cabinet today, the employees and the Government would make a matching monthly contribution of 10 per cent of the salary and the dearness allowance and the pension contributions and accumulations would be accorded tax preferences up to a certain limit.

While the existing bank branches and post offices would be used to collect contributions and interact with participants, the scheme provides for a Central record-keeping and accounting infrastructure and several pension fund managers.

The employees would have three options for investment, the first being where 60 per cent of the investments would be in Government securities, 30 per cent in investment grade corporate bonds and 10 per cent in the equity market. Under the second option, the investments would be around 40 per cent each in Government securities and investment grade corporate bonds and 20 per cent in equity.

The third option provides for 25 per cent each in Government securities and corporate bonds and 50 per cent in equity.

Another significant clause is that the pension fund managers would be free to make investments in international markets, subject to regulatory restrictions and supervisory provisions. For overseeing the pension sector, an independent Pension Fund Regulatory and Development Authority (PFRDA) would be set up and till that is done, an interim regulator would be appointed through and executive order. The interim PFRDA would have as Chairman a person of status not less than that of Secretary to the Government of India and would function under the overall administrative control of the Ministry of Finance.

By utilising the various investment options, the Government estimates that an individual employee would build up a pension wealth providing for 56 per cent of the last emoluments (basic pay and dearness allowance) for group `A' employees, around 58 per cent for group `B', around 59 per cent for group `C' and around 68 per cent for group `D' employees. The new scheme provides for an individual to normally exit from it at or after the age of 60 but at the time of exit, it would be mandatory for the individual to invest 40 per cent of the pension wealth to purchase an annuity from a life insurance company approved by the Insurance Regulatory and Development Authority (IRDA).

The option of joining the new system is available to the State Governments as and when they decide. Explaining the rationale for switching from the current system where the Government provides pension out of its own resources to the contributory system, official sources said that while only about 11 per cent of the working population currently enjoyed retirement benefits, the financial burden of the deferred pension benefit was rising to unsustainable levels.

The total pension liability of the Central Government employees rose to 1.66 per cent of the gross domestic product in 2002-03 and the actual outgo estimated at Rs. 23,158 crores (excluding telecom) for 2003-04. This expenditure rose from Rs. 15,346 crores in 1998-99 to Rs. 21,172 crores (excluding telecom since the Department of Telecom has been corporatised) in 2002-03.

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