The existing public service pension scheme in Sri Lanka has become a cause of concern to the Government in view of the large absolute amount of expenditure incurred and the rapid rising trend of such expenditure.
The State Minister of Labour and Trade Unions, Ravindra Samaraweera said recently that the present strength of the public service is 1.4 million, whereas ideally, it should be around 800,000. He added, “The pension scheme in the present form is a heavy burden on the people. With this in view the Government is considering to evolve a contributory pension scheme.”
The debate relating to the need for the reforms of the Government pension system is continuing.
In Sri Lanka, pension benefits form part of public servants’ conditions of service. It is financed and managed by the Government. Public service includes employees of government, statutory bodies and local authorities. Their pension benefit consists of a fixed monthly payment until death for the pensioner, and also includes survivors’ benefits. Thus, the public service pension is a “defined benefit” scheme.
Employees in the private sector are not included in this scheme. They and their employers are instead required to contribute to the Employees’ Provident Fund. The employee contributes 8 % of the salary while employer contributes minimum 12%. There is also an Employees Trust Fund where the employer contributes 3 % of the employee’s salary. On retirement, a subscriber can withdraw the balance lying on these two accounts as the “retirement benefit.”
Reforms
One important factor generally cited for introduction of pension reforms is on account of the rapid growth observed in public servant pension payments, which is likely to pose a serious threat to fiscal sustainability.
Some economists fear that this sharp growth could crowd out public investments in education, health and infrastructure. This is especially the case with a low-income country with a limited tax base like Sri Lanka. It has also been observed that public servant pension benefits are generous compared to those available to the private sector. Public servants represent only 17 per cent of the total labour force. It is argued that a large section of the society falls outside the purview of the social security provided by the government. Proponents of this argument maintain that it is not fair by the rest of the labour force who are compelled to sustain the subsidy-based pension programme for a small segment of workforce.
It is further argued that there is a need to look into many others in the uncovered labour sector to combat poverty among the elders. A number of countries provide social security to the old.
However, some observers believe that public sector pension, because they are not based on contributions, can be described as deferred salaries. Public servants accept a lower current salary in exchange for the promise of a pension in their old age. If this pension were contributory, they would insist on a higher salary. A good reform system should take into consideration this point-of view also.
Indian experience
It is this writer’s opinion that the Government must appoint a high-powered committee to examine the problem of continually rising expenditure on public service pension benefits.
Important issues that should evoke the interest of the committee include the extent of the public servants’ pension liability in the past, present and future; factors responsible for such growth; and alternative methods to be adopted to reduce the financial outgo and restore fiscal balance while retaining the current pensioners’ legitimate rights.
In this instance, we may be able to learn a great deal from the Indian experience.
National pension system
According to UNO’s Population Division, World's life expectancy is expected to reach 75 years by 2050 from present level of 65 years. The better health and sanitation conditions have increased the life span. As a result, workers of post-retirement years have begun to increase. Thus, rising cost of living, inflation and increasing life expectancy made retirement planning essential part of any worker’s life.
By mid-90s, India understood this reality, and in 1999, commissioned a national project titled “OASIS” (an acronym for old age social and income security) to examine policy related to old age income security in India.
Based on the recommendations of the OASIS report, Government of India introduced a new Defined Contribution Pension System instead of a Defined Benefit Pension system.
In order to provide social security to more citizens, Indian Government started the National Pension System (NPS). It was launched on January 1, 2004. Three months before this launch, India also established Pension Fund Regulatory and Development Authority (PFRDA) to act as the regulator of the pension sector in the country. The authority is broadly responsible for the orderly growth and development of the pension sector in India.
NPS was started with the objective of providing retirement income to all working citizens.
NPS aimed to institute pension reforms and to inculcate the habit of saving for retirement among the working citizens.
Initially, NPS was introduced for the new government recruits (except armed forces) but with effect from May 1, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers.
NPS offers some important features to help subscriber save for retirement:
The subscriber will be allotted a Permanent Retirement Account Number (PRAN). This account number will remain the same for the rest of subscriber's life.
PRAN provides access to two personal accounts: Tier 1 Account: This is a non-withdrawable account meant for savings for retirement; Tier 2 Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. Tier 2 is meant for independent workers.
All Government employees will contribute through their workplace to National Pension System 10% of his/ her salary every month. This is mandatory. An equivalent government's contribution will be invested in his/her NPS account. The subscribers can withdraw from NPS only on his/ her retirement, final resignation or death.
The funds contributed by the subscribers are invested by the PFRDA through registered Pension Fund Managers (PFM’s) as per the investment guidelines provided by PFRDA. At present, there are eight Pension Fund Managers (PFM’s) and the subscriber has option to select any one of them to handle his account.
On retirement, a subscriber cannot take home the total accumulated savings but should invest minimum 40% of it to purchase a life annuity from PFRDA. This is mandatory.
Life annuity is a financial instrument which offers monthly/quarterly/annual pension at a specified rate for the period the subscriber chooses. Indian Life Insurance companies which are licensed by Insurance Regulatory and Development Authority (IRDA) are empowered by PFRDA to act as Annuity Service Provider’s to provide annuity services to the subscribers of NPS. Currently, there are 7 ASPs empanelled by PFRDA.
The ASP’s may offer some variants which have slightly different or combination type of annuities: (1) Pension payable for life at a uniform rate to the annuitant only; (2). Pension for life with return of purchase price on death of the annuitant (Policyholder). (3). Pension payable for life and increasing at a simple rate of 3% p.a. (4) Pension for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant. (5) Pension for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
Benefits of NPS
Some of the benefits of the National Pension System (NPS) are: (1) It is a transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the subscriber will be able to know the value of the investment on day-to-day basis; (2) It is simple - all the subscriber has to do, is to open an account with his/her workplace office and get a Permanent Retirement Account Number (PRAN); (3) It is portable - each subscriber is identified by a unique number and has a separate PRAN which remains same even if he/she gets transferred to any other office; (4) It is regulated - NPS is regulated by Pension Fund Regulatory and Development Authority with transparent investment norms and regular monitoring and performance review of fund managers.
Looking forward, India is already witnessing a paradigm shift in the entire concept of public pension scheme as a social security measure from a welfare-oriented to needs-oriented one, with much greater accessibility and sustainability. NPS is now regarded as a great framework that can enable long term savings for retirement and provide a decent hedge against post-retirement income uncertainties for the unorganised sector, besides being a valuable income supplement for the organised sector.
NPS is now equipped to take on the opportunities and challenges of creating an inclusive, affordable and fair pension system in India.
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