FAMILY PENSION

The Pension Bill is shown for year 2001-2002 Rs.22,410/- crores. So, pension bill for 2003-2004 is estimated to be Rs.25,000 crores, which was Rs.3271 crores in 1990-91. The total number of Central Government Pensioners was 32.33 lacs in year 1994-95. Eight years have passed and we can reasonably assume that there are about 38 lacs pensioners, who take away Rs.25,000 crores pension. The Revenue Receipt of the Central Government for the year 2002-2003 was estimated at Rs.2,45,105 crores and out of which about Rs.24,000 crores is for pension, which 38 lacs pensioners take away, which is 10% of Revenue Receipts. The Central Government Revenue expenditure was estimated at Rs.3,40,482 crores for year 2002-2003, which includes Interest-Payment, Defence, Pay, Pension, Subsidies and Grants and so, Rs.95,377 crores was revenue deficit which was adjusted from borrowed funds.

The gravity of financial situation of the Central Government and State Governments was forcefully explained and presented in an article published in "Business Standard" by A. V. Rajwade dated 18/04/2003 under captions "Pension and Provident Fund Liabilities." The relevant paragraphs are reproduced as under which pinpoints Gravity of Financial Situation :-

"The burden of pension on the fiscal resources of the States and the Centre has gone up sharply because of the manner in which the recommendations of the Fifth Central Pay Commission were implemented - the then government gave even more benefits than the Commission had recommended, and completely overlooked its proposals for economies in expenditure. Once the Centre implemented the proposals, state governments were forced to follow suit. Analysis of India's fiscal situation would rank the Central Government's decision on the wage issue as one of the most fiscally irresponsible decisions ever taken. No wonder that most of the State Governments finances have been crippled.

Under the defined benefit pension schemes, the amount of pensions to which retired government employees, and their families after their death, are eligible depend on the salary levels. In other words, the burden of pension goes up with salaries - so much that, in the case of several State Government, the burden of pension is already more than their administrative cost including salaries of existing employees! (The total pension amount for the Centre and State together is already of the order Rs.50,000 crore, more than doubling as percentage of GDP to 2 percent in just seven years time) and, even if the finance minister's proposal regarding the pensions for new employees is implemented at both the Centre and the State levels, the pension burden will keep increasing for many, many years to come, as employees under the existing scheme retire, increasing the number of retires eligible for pensions. Apart from the rise in salary level and hence pensions another reason for the increased burden on fiscal resources is that people are living longer. While the increase in life span is obviously a positive feature, the fact remains that it adds to the pension liabilities. It is worth noting that, broadly speaking, the pension benefits of government employees have remained unchanged, in fact improved, since the days of the British. In the mean time of course the number of employees has gone up sharply, as also the longevity of life. I have not come across any actuarial study of the likely amount needed to pay pensions over say the next 20 years surely the figure would be staggering, even on the assumption of no further pay increases."

Pay-Pension not discussed :

Every year, after presentation of the Budget, the number of editorials are written, articles are published in the Newspapers on the Budget and experts discuss regarding provisions of Income-tax and possibility of growth in the Industries. The two topics are not discussed on Pay-Bill of the Central Government 38 lacs employees and increase of Dearness-Allowance of about Rs.1600 crore per year, which has been dealt with in earlier chapter.

The Pension Bill of about 38 lacs of Central Government pensioners, which was Rs.3211 crore in year 1991-92 has increased to Rs.25,000 crore in year 2003-04 (estimated), is not discussed in the Newspapers or T. V. discussion.

My one relative who had retired in 1978 from All India Radio and his pension was fixed at Rs.800 in the year 1978 and his maximum pay was about Rs.2400 per month in the year 1978, 33% of last basic pay was given as pension and his pension was fixed at about Rs.800 and now the gets about Rs.8,000 per month. The High Court Judge who had retired with pay of Rs.3500/- per month is getting Rs.15000/- to Rs.17000/- per month as pension. The reader will be interested to know how pension of Rs.800 has increased to Rs.8,000 per month of my relative and other pensioners? The increase of pension bill of Rs.25,000 crore for year 2003-04 (estimated) for about 38 lacs Central Government employees is explained as under :-

D.S. Nakara versus Union of India Judgment of Supreme Court

On May 25, 1979, Government of India, Ministry of Finance, issued Office Memorandum No.F-19(3)-EV-79 whereby the formula for computation of pension was liberalized but made it applicable to Government servants who were in service on March 31, 1979 and retired from service on or after the date (specified date for short). The formula introduced a slab system for pension formula was applicable to employees governed by the 1972 Rules retiring on or after the specified date. The pension for the service personnel which will include Army, Navy and Air Force staff is governed by the relevant regulations. By the Memorandum of the Ministry of Defence bearing No.B/40725/AG/PS4-C/1816/AD(Pension)/Services dated September 28, 1979, the liberalized pension formula introduced for the Government servants governed by the 1972 Rules was extended to the Armed Forces personnel subject to limitations set out in the memorandum with a condition that the new rules of pension would be effective from April 1st, 1979 and may be applicable to all service officers who become / became non effective on or after that date (for short specified date).

The above notifications were challenged in D.S.Nakara's case and the following question arose, which are formulated in para II of reported judgment of the D.S.Nakara's case versus Union of India, reported in A.I.R. 1983 Supreme Court at page 130.

Do pensioners entitled to receive superannuation or retirement pension under Central Civil Services (Pension) Rules, 1972 (1972 Rules for short) form a class as a whole? Is the date of retirement of a relevant consideration for eligibility when a revised formula for computation of pension is ushered in and made effective from a specified date? Would differential treatment to pensioners related to the date of retirement qua the revised formula for compensation of pension attract Article 14 of the Constitution and the element of discrimination liable to be declared unconstitutional as being violative of Article 14?

The Supreme Court held that Ex. P-I and P-II violative Article 14, in D. S. Nakara's case A.I.R. 1983 SC page 130 at 150 as follows :

"Exhibits P-1 and P-2, violates Article 14 and is unconstitutional and is struck down. Both the memoranda shall be enforced and implemented as read down as under : In other words, in Ext. P-1, and words,

"that in respect of the Government servants who were in service on 31st March, 1979 and retiring from services on or after that date"

and in Exhibit P-2, the words :

"the new rates of pension are effective from 1st April, 1979 and will be applicable to all service officers who became/become non-effective on or after that date"

are unconstitutional and are struck down with this specification that the date mentioned therein will be relevant as being one from which the liberalized pension scheme becomes operative to all pensioners governed by 1972 Rules irrespective of the date of retirement. Omitting the unconstitutional part it is declared that all pensioners governed by the 1972 Rules and Army Pension Regulations shall be entitled to pension as computed under the liberalized pension scheme from the specified date, irrespective of the date of retirement. Arrears of pension prior to the specified date as per fresh computation is not admissible. Let a writ to that effect be issued. But in the circumstances of the case, there will be no order as to costs."

The above Supreme Court judgment was criticized in Constitutional Law of India, Vol. I, by H.M.Seervai (1991 edition). The learned Author Shri H.M.Seervai has submitted after detailed discussion in paragraphs 9.53, 9.54 at page 464-466, which are reproduced as under:

D.S.Nakara's judgment criticized by Shri H. M. Seervai :

"If the classification of pensioners between those who retired before and those who retired after a specified date was invalid, what was the consequence of striking down the invalid part? Desai J. held that it resulted in all retired persons getting the revised pension. It is submitted that this conclusion is clearly wrong for the reasons set out below :

1. The Court observed that "(the-) financial implication in such matters (like pensions) has some relevance." The Court then took upon itself to go into budgetary calculations, and held that Government's estimate of an extra expenditure of Rs.2300 million was too high, and on the figures supplied to the Court the extra expense would at the highest come to Rs.530 million. Desai J. added : "Therefore we are satisfied that the increased liability consequent on this judgment is not too high to be unbearable or such as would have detracted (sic) from covering the old pensioners under the scheme." (italics supplied). It is submitted that the Court's action was a clear usurption of executive and legislative power. The framing of the Budget which, is governed by elaborate provisions in our Constitution. Article 109 provides a special procedure in respect of Money Bills. Article 109(3) shows that even members of the Council of States are unable to alter a Money Bill passed by the House of People if that House does not accept the Council's recommendations. Thus control over Money Bills is with the House of People. " Money Bill" is defined by Article 110 and sub-Article(1)(d) provides for the appropriation of moneys charged on the consolidated Fund of India, and pensions are charged on that Fund. Further Art.113 provides for Procedure in Parliament with respect to estimates.

2. It will be seen from Art. 113 first, that the framing of the Budget and the demand for grants is to be made by the Ministry, because the recommendation of the President (Art. 113(3) ) is in reality the recommendations of his Council of Ministers. Secondly, Art. 113(2) shows that even the House of the People has no power to increase the amount of the demand for grants recommended by the President. The House has power to assent, or to refuse to assent to any demand, or to assent to any demand subject to a reduction of the amount specified therein. It is submitted that this is clearly necessary for it is for the Council of Ministers to decide upon their priorities, in respect of expenditure to be incurred during the financial year, bearing in mind the deficit, if any, in the budget, and the extent to which that deficit is acceptable. Expenditure charged on the Consolidated Fund is not subject to the vote of the House of the People, though the House can discuss the proposed expenditure.

3. A Court has neither the power nor the right to say what expenditure should be provided for in the Budget. The Council of Ministers has to take a view of the Budget as a whole, having regard to the Government's order of priorities in expenditure. Discussions in the House of People or the Council of States may influence those priorities, but cannot control them except by the unlikely expedient of throwing out the Council of Ministers. No doubt the Court was impressed, and rightly impressed by sad plight of Government pensioners. But it had no means of knowing whether other classes of people were not in a sadder plight, whose claims had also to be met. It also does not seem to have occurred to the Court that if the invalid part of the classification was struck down, it was open to Government to revise pension upward, but at a lower rate, for all retired civil and military servants, in order to keep reasonably within the limit of the expenditure which Government considered appropriate.

4. The constitutional "mandate" of Directive Principle is misapplied, for Directive Principles do not confer any right on anybody and do not impose any obligation on Government for Government is left free to ignore the "mandate" if it chooses, and it had chosen to do so.

It is submitted that the correct order to pass was to strike down the two memoranda revising pensions, just as Alagiriswami J. had struck down the whole provision which divided tenants into pre-1955 and post-1955 tenants. (see para 9.50 above). However, considering the grave effect which an order striking down the revised pensions would have had, it is submitted that the correct order for the Court to have passed was to hold that the classification was invalid, and then to adjourn the matter for a period of 3 or 4 months to enable Government to come forward with a scheme for revised pensions according to law. It is unlikely that the Government would have totally withdrawn the two Memoranda revising the pensions, because that would have alienated considerable popular support, for the revised Memoranda showed that government itself was of the opinion that an increase in the rate of pension was required. Government could, if it thought fit, have extended the revised pension to all pensioners, or it might have increased pensions for all at a lower revised rate, although the theoretical possibility of government withdrawing the revised pension altogether could not be ruled out. But in that event, the Court had done its duty. It had called attention of the government to what was fair and just, and if government thought otherwise, it was not for the Court to usurp executive and legislative power in order to do what the Court considered just and fair.

Nakara's case applied by 4th Pay Commission :

The Hon'ble Supreme Court had observed in above D.S.Nakara's case that the burden will be Rs.233 crores. But the principle continued to apply to old pensioners retired before 1986, who got advantage of new scales of the same post fixed by the Fourth Central Pay Commission and my relative's pension was increased from Rs.800/- when Fourth Pay Commission recommendations were accepted. The Central Government did not take steps to reduce pension from 50% of basic pay to 33% of basic pay on new scales.

Fifth Central Pay Commission :

The Government had not referred the case of past pensioners before Fifth Central Pay Commission, who had retired before 1-1-1996 which was specifically referred before Fourth Central Pay Commission. The Chairman in the Fifth Central Pay Commission, Vol.III, page No.1745 Report has observed :

"Our Terms of Reference require us to examine the existing pension structure and death-cum-retirement benefits with a view to having a proper pension structure for 'pensioners' and make recommendations relating thereto which may be desirable and feasible. This gives us a broad enough canvas and have tried to fulfil our mandate. We have not allowed the deletion of the phrase "pensioners, both past and present" which had been used in the Terms of Reference for the Fourth Central Pay Commission to constrict our vision and have included past pensioners within the ambit of our consideration."

According to the information contained in the brochure of Central Pension Accounting Office entitled, "CPAO High lights 1994-95", there were 32.33 lac pensioners, including family pensioners, as on April 1, 1995, of which 16.66 lacs were defence pensioners. The number of family pensioners in the year 1993-94 as intimated by the Department of Pension and Pensioners' Welfare was estimated to be 4.5 lacs (both civil and defence).

The Ministry/Department-wise break-up of pensioners for the period 1990-91 to 1994-95 is given in the following Table :-

Includes Freedom Fighters numbering 1.62 lacs (Approximately) upto the year 1994-95.

Pension Expenditure :

The expenditure on pensions has been increasing over the years, The details of Central Government pension expenditure as per appropriation accounts and as contained in the brochure of Central Pension Accounting Office "CPAO Highlights 1994-95" for the period 1990-91 to 1995-96 are as under.

Includes Rs.103.86 crores towards pension to Freedom-Fighters.

The Government of India had published Economic Survey 2001-2002, in which Box 2.1, Page No.44 has dealt in details the Central Government Pension system, which is reproduced herewith, namely : Box 2.1 Central Government Pension System.

BOX 2.1 Central Government Pension System

There are three main components of retirement benefits currently provided to Central Government employees:

• lump-sum Gratuity; based upon number of years of service. This is governed by the Payment of Gratuity Act 1972. The gratuity is based upon the length of service rendered by an employee and the last pay drawn; and is paid as a lump-sum amount on retirement/death, subject to a ceiling (the present ceiling being Rs.3.5 lakh);

• a General Provident Fund (GPF), to which employees contribute, also provides for a lump-sum payment on retirement. This is a Defined Contribution (DC) scheme. Each government employee is required to contribute a minimum of 6 per cent of basic pay to the GPF, with no matching contributions from the Government. The amounts contributed by the employees are retained in Government's cash balance and carry a rate of interest, which is fixed by the Government from time to time and;

• an unfunded Defined Benefit pension, which is paid from current revenues. This is the most significant retirement benefit. The maximum "Replacement Rate" (the ratio of income from retirement benefits to pre-retirement income, after mandatory deductions) is 50 per cent of the average salary during last ten months of service. There is also a maximum limit on the absolute amount of pension, which is 50 per cent of highest pay in Government. The pension benefits are paid out of current revenues, in the case of the non-commercial departments. As per present Government policy, pensions are indexed not only to inflation but also to changes in the salary structure of serving employees.

An important point to note is that the Government pension system in India is not a true Pay-As-You-Go (PAYG) system, as conventionally defined. In a true PAYG system, benefits to retirees are (at least partially) funded through contributions by existing employees and/or payroll taxes on those working. Government employees in India do not contribute to the fund of their basic pension benefits, which are met solely from Government's current revenues.

The implementation of the Fifty Central Pay Commission (FPC) recommendations brought about a sharp spurt in the pension payments in the latter half of the 1990s due to the following major changes in the pension structure

• pension levels were linked to salaries of serving employees thus, in effect, ushering in a "one-rank, one-pension" regime;
• these linkages were extended to all existing pensioners, irrespective of date of retirement;
• basic pension amounts were given full indexation to inflation; and

• commutable amounts were increased from the existing 33 per cent to 40 per cent. As a result pension payments for all departments surged from Rs.11,375 crore in 1997-98 to Rs.21,117 crore in 2000-01, i.e., an increase of almost 86 per cent over three years. It is instructive to note that FPC had assessed the financial implications of its recommendation for pension of the order of Rs.1,170 crore per annum, which corresponds to an increase of Rs.3,510 crore over the three years 1997-98 to 2000-01.

There are 5 major sub-categories of Central Government pensions which relate to (i) Civil (ii) Defence (iii) Postal (iv) Railways and (v) Telecom. Over 50 percent of pension payments of Central Government are accounted by Defence. The pensionary expenditure of the Railways and Telecom is not met from the Consolidated Fund of India. Although the Department of Telecom has been corporatised, pay and pension of its employees has been fully protected by the Government and their pension liability is ultimately a sovereign obligation. It would be seen from the Table below that pension expenditure of the Government of India (including Telecom and Railways) has gone up by approximately six times over a ten year period i.e., from Rs.3,271 crore in 1990-91 to Rs.19,446 crore in 1999-2000. Revised estimates for the year 2000-01 place pension outgo at Rs.21,117 crore (i.e. an increase of approximately Rs.1,700 crore in a single year). Pension expenditure (Posts, Civil, Defence, Railways and Telecom) as a percentage of GDP at current market prices rose from 0.6 per cent of GDP in 1995-96 to one per cent in 2000-01. Further, pension expenditure (defence plus civil) as a proportion of net revenue receipts of the Centre rose from around 4 per cent in 1995-96 to about 7 per cent in 2000-01(RE).

The Working Group on Pension Liabilities (henceforth referred to as WG) has expressed the view that pension liability of the Central Government would go up further over time primarily on account of several factors which include: increased life expectancy; indexation of pension to the wage of serving employees; full neutralisation of inflation linked to cost of living index; higher rate of retirement in the next 10 years because of a fifty-seven per cent increase in employment over the period 1957-71; decrease in spread of salaries by successive Pay Commissions resulting in increase in average pension; increase in promotional avenues leading to increase in final salaries and hence in pensions and; revision of pension of past pensioners in the line with successive Pay Commission recommendations.

The WG has recommended a transition to a funded system of pension payments for new Government employees and a system of incentives to encourage migration of existing employees to funded systems. The most important effect of such a fund is to make explicit and transparent the pensionary liability of the Government of India. It should be stressed, however, that pre-funding pension liabilities from the general budget does not reduce the quantum of the liability. If anything, there will be an adverse impact on the Government's fiscal position in the short term in the process of establishing the pension fund. This fiscal impact can only be mitigated for the increment liability of new employees with the introduction of a DC component from these employees, whether partial or total. The greater the magnitude of the DC component in the pension package of the new employees, the lower will be the incremental impact. There should also be no corresponding (one-for-one) increase in 'employees' salary levels to compensate them for this contribution.

Justification for change in Pension : By Vasant J. Desai

In India, Pension is non Contributory and is paid out of Revenue Receipts, which fact is not noted seriously in Nakar's Case, Fifth Pay Commission and Mr.Shetty's Commission.

Financing of funded Scheme :

Fifth-Pay Commission in its Vol.III Chapter 132 Retirement benefits in paras 132.6 and 132.7, page 1774 have noted.

"132.6.. In a Comparatively large number of countries, the pension scheme for public servants are unfunded i.e. based on the pay-as-you-go for principle (PAYG). Under this principle, workers today pay pensions to retirees expecting that their pension will be paid by future workers. The main source of financing is, therefore, the government and payment is made out of its current budget.

Thus, there is no saving or contribution from the current budget to pay future pension" :

"132.7. In a funded scheme, a stock of capital accumulates to pay the future obligations, so that the aggregate contribution plus investment returns are sufficient at any time to cover the present value of the entire stream of future obligations. The current generation of workers supports itself through wages and saves part of its output for support after retirement."

Fifth Pay Commission has given details about nations where employees contribute towards pension.

Above discussion clearly shows the Government has not to bear burden of entire pension amount as there is contributory system in other countries and they have got separate fund to discharge liabilities.

Power to make Pension Laws :

The Central Government has got enough powers to make suitable Act for past pensioners or pensioners under List-I, Specific Entry 71 of Union List Seventh Schedule of the Constitution of India, which reads as under :-

"Union pensions, that is to say, pensions payable by the Government of India or out of the consolidated fund of India."

Similarly, the States can also pass appropriate legislation for their employees considering their own financial position under entry 42 of List-II, State List Schedule VII of Constitution of India and entry 42 reads as under :-

Entry-42 State List :-

State Pensions, that is to say, pensions payable by the State or out of the consolidated Fund of the State.

The Central Government had increased pension from 33-1/3% to 50% and power to increase also includes power to decrease pension 50% to 33-1/2%, or even lump-sum formula can be enacted for future or past pensioners and contributory system can also be introduced. The contributory pension system can be introduced as per working group suggestions. The Pension Act 1871 is out-dated and new Act can be enacted.

Pension Act should be enacted :-

At present, pension to the Central Government employees is governed by the Central Civil Services Pension Rules, 1972 and there is no specific Central Government's Act governing pension. The Central & State Governments have sufficient powers as stated above to enact Pension Act for their employees. The Central Government employee is entitled to get pension on completion of his service rendered to the Government. Above principle is well established. The Central Government employee was getting 33% of basic pay on his date of retirement and said pension was increased to 50% of basic pay in year 1979. The Pay-Scales were revised under the 4th Central Pay Commission and the 5th Central Pay Commission - recommendations. However, pension is continued to be paid on the basis of 50% of basic. Pay. The Government which has got power to increase pension, and has got also power to decrease the pension and there is no guarantee given how much pension an employee is entitled to get as stated above. The Central Government Pension-Bill Rs.3271 crore in year 1991, has increased to Rs.24,000 crore, and about 38 lacs pensioners of the Central Government get the said amount. Out of above amount-pension of 1,62,000 freedom-fighters pension is also included. The Central Government can enact pension act and can reduce pension to 30% of basic pay as pay-scales are considerably revised. It is also suggested that D.A. should be discontinued in view of the fact that the foreign countries have discontinued the D.A. as it increases inflation.

It is absolutely necessary for the Central & State Governments to make the proper legislation with regard to abolition of D.A., reduction of percentage of pension from 50% to 30% of basic pay and abolition of family pension and pension of the freedom fighters. If above steps are taken the Central Government Bill of Pay & Pension, which is about Rs.57,000 crore can be reduced to about Rs.35,000 crore.