Tuesday, 1 November 2011

Civil Service and Military Pensions in India

This blog is really interested in research work on pensions as it connects so many areas of economics – microeconomics, behavioral economics, macro, financial economics etc.

In this superb paper Ajay Shah and Renuka Sane, review the pensions in India’s civil and military sectors. The paper tells you the pension system in each of these two areas and how the system is being moved to New Pension System. The transition has been easier in civil services compared to military services.

Unlike many parts of the world, where population-wide systems lead the pension reform process, in India, civil services pension reform came first. New recruits, who were traditionally given a defined-benefit (DB) civil servants pension, were placed into a defined-contribution (DC) individual account system called the New Pension System (NPS) from January 2004. By and large, this has been implemented in all parts of government except for three state governments, and the armed forces.

Under the NPS, employees contribute 10 percent of their salary, matched by a 10 percent contribution from the employer into pension funds managed by professional fund managers. Withdrawals are allowed from the age of retirement currently set at 60, with a requirement that 40 percent of the accumulated balance be annuitized. Civil service pensions, along with occupational pensions administered by the Employees Provident Fund Organisation (EPFO), are the only formal-sector pension programmes in India. These two programmes cover about 12 percent of the workforce. Expenditure on civil service pensions, prior to the reform, was 2.31 percent of GDP in 2004–05 (Shah 2006) and by one estimate, the implicit pension debt had reached 55.8 percent of GDP (Bhardwaj and Dave 2005). High expenditures and low coverage were part of the motivation for the genesis of reform that is now underway.

NPS architecture is in place but its acceptance has been slow and gradual:

The NPS architecture is in place. The Pension Fund Regulatory & Development Authority (PFRDA) functions as an arm of the Ministry of Finance and has the mandate of regulation and development of the pensions sector in India (albeit without the full legal powers of a financial regulator). A record-keeping agency has been appointed, which interfaces with the accounting infrastructure of the central government and consolidates all contribution information. It reconciles this information with actual funds held in a Trustee Bank. The agency then passes this to the pension fund managers whose sole task is to invest the funds. Several state governments are in the process of plugging into the NPS architecture. The PFRDA has also appointed agencies such as banks to serve as the interface between NPS customers outside of the government and the record keeping agency.

While the NPS has made several achievements, these have come about at a very slow pace, and the implementation of the NPS continues to be plagued by delays. Political constraints have held up the legislation which would give the PFRDA powers of financial regulation. Several state government payroll processes have not yet been integrated with the NPS architecture. Investment guidelines continue to suffer from weaknesses on access to domestic and overseas equity investment. Voluntary participation from the unorganized sector has, as yet, been minimal.

There are about 1.1 mn subscribers in NPS and more to come. All new civil recruits part of NPS which has still not been extended to Military services and requires communications, education etc.

It tells you about traditional civil service pension (TCSP) system which is an unfunded pay-as-you-go (PAYG) DB pension given to employees of the central government.

In the 1970s and 1980s, the size of government expanded rapidly. In this period, payments on the DB pension appeared to be small when compared with the wage bill. From the early 1990s onwards, the headcount of civil servants started declining, reflecting both the austerity measures adopted after the IMF Program in 1991 and a new economic policy philosophy which emphasized a small State. Pension payments to the recruits of the previous decades then started looming large.

The 2009–10 budget estimated a total outflow of Rs.484 billion (approximately US$10 billion or 1% of GDP) on pensions and retirement benefits of central government employees (GoI 2009b). State government expenditure on pensions stood at Rs.1003.5 billion3 (approximately US$22.5 billion) in 2009–10 (RBI 2010). The outflows are expected to rise as the cohort of hires between the 1970s and 1990s retires. Bhardwaj and Dave (2005) estimated that the implicit pension debt on account of the civil service pension worked out to roughly 56 percent of GDP, under fairly conservative assumptions.

Thus, even though civil servants made up only 6–10 percent of the paid workforce (Bhardwaj and Dave 2005; Garg and Bhardwaj 2009), their pension provisions were proving to be extremely expensive. It was therefore felt that the country was spending a disproportionate amount of money on a small set of the population, which was relativelybetter off to begin with.


An interesting paper on a relatively unknown but important area of Indian economy…

by: Amol Agrawal

Source: http://mostlyeconomics.wordpress.com/2011/10/31/civil-service-and-military-pensions-in-india/

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