Introduction of Contributory Pension Scheme in Kerala

The Kerala government, earlier this month, replaced the “Defined benefit based” pension scheme by the “Defined contribution based” pension scheme. State government employees went on a six-day strike to protest against the new scheme, which was introduced without taking the employees’ views into consideration

The six-day old strike by state government staff and teachers in Kerala, which was called off on 14th January, was the first serious agitation against replacement of the “Defined benefit based” pension scheme in government service by the “Defined contribution based” pension scheme, through the back door. As all strikes so far by government employees in India, the calling off was just a face-saving compromise, without much result to report home. Still, the issues the strike successfully brought to surface and the eagerness of the state government to somehow get back the employees for work, makes the six-day strike a cause for a re-look at the New Pension System. It was introduced by the Centre for central government employees, excluding majority of defence employees from 2004, legislative support for which is still ‘hanging’. Kerala finance minister KM Mani reportedly had negotiations with employees’ representatives till 12.40am on 13th January night which was followed with a wrap-up discussion between employees’ leaders and chief minister Oomen Chandy which lasted till 1.40am the next day.


What ails the New Pension Scheme?


There was broad understanding between the government and employees on the following:

  • The Contributory Pension Scheme (CPS) will be applicable only to employees joining service from 1 April 2013.
  • There will be arrangements to look into the problems that arise on implementation of the CPS.
  • The problems of employees with low emoluments and short service period will be examined.
  • The Parliamentary Standing Committee has recommended guarantee of minimum pension to be not less than that eligible under EPF Pension scheme.
  • When central regulations are in place, there will be a provision to guarantee the minimum pension.
  • The state government will approach the PFRDA (Pension Fund Regulatory and Development Authority) to include the State Treasury Deposit as an eligible avenue for depositing pension funds.
  • It will be clarified in the new notification that employees in service up to 31 March 2013 will be eligible for statutory pension under the existing regulations.
  • There will not be any disciplinary action for having participated in the strike.

NPS throws great opportunity for insurers: PFRDA


Whatever be the arguments in defence of the CPS, a time-tested social security arrangement, available to a section of employees, is being dismantled without any credible alternative system in place. When one refers to social security arrangement, one has in mind all pensionary benefits including family pension. While in the private sector and profit-making public sector undertakings, employees have an opportunity to bargain and settle remunerations based on their skill and market realities, government employees and those employed in quasi-government and statutory bodies are a helpless lot, whose bargaining power is stifled in the name of public interest. It is in this context that they deserve special treatment, at least in respect of social security arrangements like pensionary benefits. The cost savings for the Government of Kerala, if any, will accrue only from the date of retirement of the first employee who joins after 31 March 2013. Till such time, there will be an additional outgo to the extent of the employer’s contribution to the fund in respect of employees joining service from 1 April 2013.


As for the central scheme, NPS has not been made applicable to defence employees who constitute a major proportion of central government employees.


To access other articles by MG Warrier, please click here.


(MG Warrier is a freelancer based in Thiruvananthapuram.)

Govinda Warrier
7 years ago
The present National Pension System (Originally introduced through an executive order for central government employees (other than Defence Forces-they were excluded temporarily by a saving clause) joining on or after January 1, 2004 has none of the features of the Defined Benefit Pension Scheme enjoyed by government employees who were in service as on, or had retired on or before, December 31, 2003. The NPS, as it stands now, is more similar to the Contributory Provident Fund Scheme with some difference in fund management and pattern of withdrawal options.
The introduction of NPS was guided by the rising unfunded pension liability of central and state governments because of the “Pay As You Go” approach followed, which, incidentally was a legacy of East India Company(Taxes were collected as they came and expenditure was incurred on demand, without much concern for sources and uses of funds!). A scientific estimate of central government’s own unfunded pension liability quoted in VI Pay Commission Report put the figure at Rs3.36 lakh crores.
External agencies suggested to GOI that prudent accounting requires funding of such liabilities. GOI got over the inconvenience by announcing to the world that India has ‘discontinued’ Defined Benefit Pension Scheme by replacing it by Defined Contribution Pension Scheme(NPS). The devil in the details like additional burden on governments as NPS involves matching contribution, Defense forces exempt from NPS form a large group in government employees and importantly, government will start reaping the benefits of the changeover only after 30 years from introduction of NPS(when the 2004 batch of employees start retiring) did not draw anyone’s attention. A study conducted by a team of experts from IIM-Bangalore, ING and GOI(Indian Pension System: Facing the Future) also did not go into such niti-gitties.
By forcing NPS on state governments and other organisations, GOI ensured a pension system which was a reliable social security instrument available for a section of employees (who didn’t factor in retirement benefits while making wage demands) smoothly got uprooted and dismantled. Another incidental benefit, many are jubilant about, was that workers’ unions became the bad boys both among pensioners and the new victims of NPS among them, considerably reducing their bargaining power.
A word about ‘funding’ pension liability on which the idea of NPS was built up. A media report which appeared sometime back about pension funds in the United States had this to say:
“Using a more conservative method of accounting for financial gains in the marketplace there is a $4.1 trillion gap between assets and liabilities- known as the “unfunded liability”-of all state level pension systems in the United States, according to State Budget Solutions, a fiscally conservative think tank that deals with tax and spending issues at the state level.”
The scare of unfunded liability which made us dismantle a good-working social security system came from that side of the Globe!
M G Warrier, Mumbai

1 decade ago
Let us have clarity on government’s financial burden issue.
VI Pay Commission noted that the New Pension Scheme implemented for civilian employees recruited on or after 1-1-2004would start yielding benefits only after another three decades. The Commission made the following observation about pension funding:
“In case, however, the Government wants to create a pension fund to discharge their pension liability, the study by Institute for Social and Economic Change (Bangalore) reveals that the net present value of the projected pension liability is Rs3,35,628 crore based on assumed rate of return of 8 per cent.”
NPS will not help reduce this liability. On the other hand, NPS increases the outflow on wage bills in respect of new recruits from the effective date of NPS by 10 per cent (Govt contribution) and further possible demands for higher differential wages in lieu of pension enjoyed by those joined earlier. These arguments mutatis mutandis will hold good for Kerala.
I am not commenting on the US experience in the absence of more details about wage structure there and government’s responsibility there to fund the pension scheme of erstwhile auto majors in US referred in the comment.
sivaraman anant narayan
Replied to M G WARRIER comment 1 decade ago
The reference to US auto majors was in the context of how defined benefit schemes have become unviable for the managements to fund in the long run. There is no mention of govt funding of such pvt sector pension schemes.
The move by the centre and state govts to move to NPS is to reduce the long term future liabilities of the pension of new employees, which will be contribution driven and not benefit driven.My understanding is, the move was not to reduce current liability of existing employees which have already accrued.
sivaraman anant narayan
1 decade ago
Given the precarious state of the State Govt.'s financial position it has no alternative but to revert to contributory pension scheme from a benefit defined pension scheme. World over defined pension schemes are under funded and have become one of the causes of sickness of the erstwhile auto majors in the US.
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