The Hindu Business Line : Defining pension benefits

The traditional civil servants pension is a pay-as-you-go defined benefit. It is an integral part of the employment contact for government employees.

In India, we do not have a comprehensive population-wide old age income security system. The vast majority continues to rely on support from their children as the main means of obtaining consumption in old age. This is rapidly changing due to breakdown of the joint family system.

There is the civil servants' defined benefit pension — which covers roughly 2.7 million workers — and the `organised sector' system run by the Employees Provident Fund Organisation (EPFO) — which covers roughly 15 million workers.

In a population of over one billion and having a workforce of over 400 million, including agricultural workers, this is abysmally low.

TCSP

The traditional civil servants pension (TCSP) is the pension programme that existed for employees of the Central Government who were recruited before January 1, 2004. The TCSP is a pay-as-you-go defined benefit pension. It is an integral part of the employment contact for government employees. There is a minimum requirement of 10 years of service before a worker is entitled to this pension.

There is no attempt at having contributions or building up pension assets, that is, it is un-funded. The benefit promised by the TCSP is a pension which is roughly half of the wage level of the last ten months of employment.

The TCSP is indexed to wages. There is a `one rank, one wage' principle, whereby all retired persons of a certain rank get the same pension. Through this, pension payments are steadily revised to reflect the growth in wages. Hence, the growth in pension benefits in old age is typically higher than inflation. The government can only meet the increasing cost of such pension with a growing population at the cost of the rest of the population.

In management of this scheme, the core issue has been that of fiscal imbalance. The pension payout of the Centre and States has risen at a compound average annual growth rate of 18 per cent over the period 1990-2004.

The TCSP was designed with an assumption where most workers who retired at 60 would be dead by 70. In recent times, employees have mortality indices comparable to those of OECD countries. All these have made the base assumptions inappropriate leading to fiscal imbalance.

(To be concluded)

(Kaushik Dutta is partner, Price Waterhouse, and Kshama V. Kaushik is a chartered accountant.)

More Stories on : Accountancy | Pension Plans

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Futures, not perfect commodity yet

Farmers bear the cross

Are we killing the self-employed?

MAT credit disclosure

Defining pension benefits

Minding those who meddle with money

The wisdom of IPO rating

Take a call on telecom

Needless controversy by the Tax Dept

Credit Policy