Dying to decline a pension

SUNDAY ISLAND: 05/06/2010

Before discussing the events of the past week, we should take a look at a working ‘provident fund cum pension scheme’ in this country.  Many people appear to think this is an unusual arrangement, and that there is something improper in allocating a part of a worker’s provident fund to a pension scheme.  And since the capital of the money that is so allocated to a pension fund will never be paid back to the worker, there are dark whisperings of ‘stealing the people’s money’ and the government wanting to avoid paying lump sums to retirees and fobbing them off with a monthly pittance instead.

While the concept of a provident fund is familiar, that of contributory pension funds are not, and here lies the problem. Wily trade unionists have been spreading panic among workers by saying that the government is going to ‘steal’ a part of the provident funds of workers and that once it goes to a pension fund the workers will never see that money again.  In a situation where provident fund contributors are used to receiving the total amount lying to their credit in the fund, losing ownership of a substantial part of that accumulated capital would certainly be resisted. 

The best way to explain this is in terms of a working example. The University Grants Commission operates a hybrid provident fund cum pension scheme for university employees. The main features of the scheme are as follows. 

* The university pension scheme was started in 1999. Before that they had only the provident fund operated by the UGC. At the time the pension scheme was introduced, existing employees were given the option of either remaining only with the provident fund or joining the pension fund as well.  If an existing employee was to join the pension fund they had to transfer 40% of all the money to their credit in the universities provident fund to the pension fund. For new employees joining after 1999, joining both the provident fund and the pension scheme was made compulsory.

* Once an employee joins the universities provident fund and pension scheme the contributions made are as follows. The employer pays 15% of the salary into the university provident fund and the employee 10%. The employee’s contribution is untouched but a little over half the employer’s contribution of 15% (amounting to 8% of the salary) goes to the pension fund.

* A member has to pay contributions for twenty years to be eligible for a pension.  If an employee retires, resigns or dies before completing the mandatory 20 years, all the money lying to his credit in the pension fund (and also the provident fund) is refunded to him or his next of kin as the case may be.

* A member of the minor staff may retire at 55. For academics the mandatory retirement age is 65. The longer you serve the bigger the pension received. An employee who serves the mandatory 20 years and retires at 55 will get about 20% of the last salary drawn.  An academic who retires at 65 after serving 35 years will get around 49% of the last salary drawn.

* When a member of the university provident cum pension fund retires he gets both the lump sum to his credit in the provident fund as well as a pension for life. After the pensioner dies, the spouse gets 50% of the pension to the end of her life. If there are any children below the age of 18 they too will be eligible to receive the pension after both the pensioner and the spouse are dead. After making all those payments the money paid into the pension fund by the original contributor belongs to the fund.

* When the scheme was first set up in 1999, only 1,400 of the exiting staff opted to join the pension scheme after transferring 40% of their provident fund money into the pension fund. The vast majority of employees opted to remain members of the provident fund only.  However after a few years, when the advantages of being in the pension fund became apparent, those who opted to remain outside started clamouring to get in, even though the original circular had specifically said that any decision taken cannot be changed later. The trade unions were pressurizing the UGC to take in latecomers. Then the UGC consulted the actuaries who advised against taking in a whole horde of latecomers with the initial payment of only 40% of the total balance in the provident fund as it would disturb the equilibrium of the fund. They recommended upping the initial contribution to 63% of the provident fund balance for latecomers. So taking in latecomers never really got off the ground.  The fact is that many university employees now regret not having joined the pension scheme when they had the chance.  

* When the last drawn salary is calculated for paying the pension, the basic salary, plus academic and cost of living allowances are all taken into consideration. At present, the highest pension being paid to a retiree by the UGC pension fund is in excess of 56,000 rupees.

* At present a little over 9,000 of the 32,000 plus university employees are members of the pension fund in addition to the provident fund.  The others as we saw above are those who had opted to remain outside the pension fund. The UGC provident cum pension fund has a base of over 1.6 billion rupees and is said by UGC officials to be on a sound footing. They are permitted to invest only in government securities and they keep overheads low by operating with a small staff from the UGC premises without separate vehicles and buildings.

The UGC scheme can be a blueprint for a provident fund cum pension scheme for the entire private sector.  It is certainly true that the government made an extraordinary mess of the plan to introduce a contributory pension fund for everybody, by not explaining things adequately to the public.  The fact is that the private sector needs a contributory pension scheme. There are many private sector employees who would gladly sacrifice a portion of their provident fund for a lifelong pension for them and their spouses. The lump sum given by the provident fund puts too much stress on the retiree to look for investments that will provide him with a good return.  If an unwise investment is made he is left destitute.  The pension on the other hand guarantees a certain income for both retiree and spouse no matter what.  

The advantage in hybrid provident fund cum pension fund schemes like in the UGC, is that members have the best of both worlds with a substantial lump sum payment as well as a lifelong pension for retiree and spouse.  If an open scheme like the above is instituted for private sector employees many would opt to join.  The government botched the whole thing by not explaining matters to the public in a way that was easily understood. But what was really reprehensible was the way the JVP and even the UNP politicized the whole issue. The JVP holds that this whole pension fund scheme is for the government to ‘steal’ the provident fund money of workers.  The UNP too has been playing the role of handmaiden to the JVP. Speaking about the death of the young factory worker in Katunayake, what Ranil Wickremesinghe said was that he had died to protect the billions in the provident fund!

Protect the provident fund money from whom?  That young man died in an ill-advised and useless clash with the police.  All this talk of the government wanting to ‘steal’ provident fund money comes from the fact that in a contributory pension fund scheme,  after paying the retiree and his spouse a pension for life, and paying any children below 18 years, the capital paid into the pension fund belongs at the end of all that, to the pension fund. That is their just return for paying the pension.  The JVP holds the position that pensions should be paid by the government to private sector employees as well without getting any contributions from them.  And any attempt to make any deduction from provident fund money elicits a mighty caterwaul about ‘stealing’ provident fund money.  

If a pension fund is prevented from retaining the contributions paid to it by the member after they have finished paying a lifelong pension to the retiree and his spouse and other eligible recipients, that would strike at the very foundation of contributory pension schemes and we are all going to end up with nothing. The difficult thing to explain to people in this country will be that a contributory pension fund is not a ‘fixed deposit’ where you can take back your capital after receiving interest payments for years.  Most of the time, the actual pension paid out to the pensioner may be higher than the income from the capital he had paid into the fund over the years.  Hence such funds need to retain the capital once their pensioners and other beneficiaries die off. And that capital goes to strengthen the fund.

There were of course serious shortcomings in the pension fund proposals put forward by the government. The spouse for example was not eligible to receive a portion of the pension after the death of the pensioner.  Then a contributor who dies or retires before completing the mandatory period of ten years and becoming eligible for a pension, will not get a refund of the contributions made.  But what was on the table was only a draft  proposal which itself was continuously changing.  Ex-JVP parliamentarian Wasantha Samarasinghe told the present writer that there were inconsistencies in the drafts they had received from the government and they had no idea which was the correct draft.

So all this was still very much a work in progress.  Press conferences, statements and seminars may have been warranted at this stage to highlight the deficiencies in the draft proposals, but certainly not street demonstrations.  The government for its part probably never thought the political trade unions would be able to wreak such havoc over something that was still at the discussion stage.  One may say that is the job of the opposition – to muddy the water and make it impossible for the government to do anything. But the political needs of the opposition should not prevent the government from implementing a programme that touches the lives of so many.  There is a need to explain to the public the principles behind a contributory pension scheme and to institute such a scheme at least for those who wish to join.

Was the EPF in or out?

Last week, this columnist said that according to clause 10(1)(b) of the Employees’ Pension Benefits Fund bill, the Employees Provident Fund does not come within the scope of the pension scheme.  Mr T.M.R. Rasseedin of the Ceylon Federation of Labour however has written in saying that according to that clause, only approved provident funds approved by the Commissioner of Labour in terms of the EPF Act No: 15 of 1958 are excluded and the EPF itself is included. The exact wording of the exclusion in clause 10(1)(b) refers to "any ‘approved scheme or fund’ approved by the Commissioner of Labour in terms of the provisions of the Employees Provident fund Act No:15 of 1958." It is certainly true that the EPF has primacy among provident funds.

However its standing for all practical purposes, is also that of an "approved fund, approved by the Commissioner of Labour in terms of the EPF Act", as for example explicitly stated in article 43(3) of the EPF Act No:15 of 1958 in relation to income tax liability.  A reference therefore to ANY "approved scheme or fund approved by the Commissioner of Labour" ipso facto draws in the EPF as well, unless it is explicitly excluded.  You can’t really bring about major changes in the workings of an important piece of legislation like the EPF Act unless it is explicitly mentioned in any subsequent legislation that seeks to effect changes.

Besides, there was the Pensions (Consequential Provisions) Bill also issued on 28.03.2011 together with the two Pension Fund Bills, which stated that ‘for the avoidance of doubts’ that the Employees Provident Fund Act No: 15 of 1958 and the Payment of Gratuity Act No: 12 of 1983 will have no application in respect of the Employees Pension Benefits Bill and the Overseas Employees Pension Benefits Bill.  However this consequential provisions bill allows the government at a later date to include or exclude those Acts in accordance with ‘changes in government policy in relation to the payment of pensions’.

In any case, all this is only of academic interest now as the whole scheme has been withdrawn. Perhaps when the Bills are reintroduced, the provisions will be more explicit. If a body like the EPF is to be brought into a piece of legislation, it will have to be done explicitly or it may never get off the ground due to problems of interpretation. What we saw over the past few weeks was an orgy of speculation about the pensions fund.  It had not been presented for debate in parliament, a draft bill was in circulation but this too was undergoing changes after every meeting between the government and the trade unions. The JVP in the meantime, allowed their tongues to travel far ahead of the intended legislation and today, nobody can unravel fact from fiction.

The UNP, which is the main opposition party should really have been doing most of the talking about the proposed pension fund.  But they have allowed the JVP take the initiative instead and are basically following the JVP.  The Saturday before last, Ranil Wickremesinghe told Tissa Attanayake to go with Joseph Michael Perera to meet the president to discuss the pension fund issue. The president had in fact acceded to a request from the UNP for a meeting to discuss the matter. But Attanayake had advised against a UNP delegation meeting the president because if the state media misrepresents matters and says that the UNP is agreeable, to the scheme there will be big problems and that even if clarifications are made later, the harm would already be done. Attanayake said they should discuss matters with the trade unions first.  RW agreed to this approach. What this shows is the extent to which the UNP has abdicated its role as the main opposition party. 

Daham to do a Panditharatne?

At the level of public policy, there is complete and abject abdication on the part of the UNP to the JVP, but internally, there is a roaring autocracy with Wickremesinghe doing just as he pleases. The new party constitution was promulgated last December to democratize the party. But what we see now is a far more draconian autocracy than anything that existed earlier.  When Sajith Premadasa agreed to de-escalate the leadership contest in April and accept the position of co-deputy leader with certain powers, the powers that were to be devolved on him were put down in a written undertaking. Quite apart from honouring this written undertaking, Sajith is now not even called for decision making meetings.  

The UNP remains hopelessly bifurcated. The shadowy "alternative working committee" of the UNP, which exists like a secret society within the party, is toying with the idea of appointing party veteran Daham Wimalasena to head a committee to go into the causes of the repeated defeats that the UNP has had to face. This would be a latter day equivalent of the Panditharatne Committee which was appointed after the 2004 April parliamentary election defeat.  If he accepts the job, Wimalasena will be touring the country hearing representations from party people. Another project on the cards is to do something for the estimated 40,000 people who have faced political victimization by the PA and UPFA governments during the past 16 years.

Some of these UNPers have in fact been victimized by both the PA and UNP governments. Those who have been subject to double victimization by both foe and friend, will be the first recipients of benefits under this scheme. The families of two UNP supporters in the Moneragala district who died during Ranil Wickremesinghe’s presidential election campaign in 1999 are to be the first recipients of a token compensation of Rs 25,000 each provided by the Sajith faction to show these people that the party still remembers. When they were in power between 2001 and 2004, the UNP leadership did not help the families of these victims despite Ranjith Madduma Bandara’s efforts to get them to do so.    

Classic Rajapaksa footwork

The manner in which President Rajapaksa defused the situation arising from the death of the FTZ worker showed the president at his best. While the JVP was licking their chops with a dead body on the road, the president spoke to the parents of the victim, released financial compensation, remanded two policemen over the incident and the IGP himself resigned over this single fatality. What more can any head of state do to put things right? That kind of footwork is why Rajapaksa is such a formidable adversary to those who oppose him. The president was completely caught off guard by the opposition to the pension fund scheme. He probably never thought that something that was nowhere near being implemented could spiral into a kind of situation we witnessed last week. But the entire build up that the JVP managed to get rolling, was defused in a matter of 24 hours after the shooting incident when the president intervened personally. In fact the JVP and the other political trade unions involved in the agitation now have less wind in their sails after the shooting than they did before the shooting; which is just as well, because now there is space to do some rational thinking about a proper contributory pension scheme for the private sector, the informal sector and expatriate workers.

During the 1977-1994 UNP government, it was the UNP as a collective entity that ruled the country. Today however, things are different. What the events of last week showed was that it is not the UPFA that rules the country today but just the Rajapaksas. Without the Rajapaksas, the UPFA is just nothing.