The Telegraph
Since 1st March, 1999
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Govt works on pay-as-you-go pension

New Delhi, Dec. 22: The government is planning a new pension scheme spanning private sector employees and civil servants.

Government employees now have a separate pension programme that will cease to exist once this comes into being. The pay-as-you-go scheme — where the pension you get will depend on the contribution you make during working life — on the drawing board will offer government guarantee of a minimum pension to poor people.

But the finance ministry also wants introduction of this scheme to be tied to the phasing out of the Public Provident Fund (PPF), whose continued high interest rates have been a sore point with Jaswant Singh and his predecessors.

As finance minister, Singh is already engaged in a battle with pro-labour ministers in the Cabinet like Sahib Singh Verma and Sharad Yadav over the payment of 9.5 per cent interest on Employees Provident Fund (EPF).

PPF interest rates are lower than EPF’s, but only marginally so as the two funds are essentially in competition with each other.

Money collected through small savings funds like the PPF is lent out to the government at pre-determined rates and constitutes a high-cost liability. If these funds are phased out, at one go, the Centre can cut its debt and interest burden.

At the same time, the lower, market-determined interest rates of the new pension scheme, whose funds, too, are likely to be invested heavily in government paper, will overtake the EPF’s as the benchmark rate.

Last Friday, Singh indicated to journalists that pension rates may have to be aligned to the market, though a way of protecting senior citizens would have to be worked out.

By putting civil servants’ pension under the new scheme, the ministry hopes to reduce the government’s own ever-bloating pension payments. Civil servants’ pension is now paid along with dearness allowance, which goes up with inflation.

Besides, every time civil service pay scales go up, pension rates for all employees, irrespective of when they retired, rise, too.

Under the new scheme, the sole criterion for determining pension will be how much money the pensioner deposits during working career, with greatly-reduced liability for the government. It will be applied with retrospective effect to civil servants who were recruited after the last pay commission recommendations.

The scheme will be managed by private sector fund managers and supported by a complex system of cross-subsidy to enable the government to guarantee a minimum pension to the poor. It will not get any financial aid from the government, but will be given tax relief in the next budget.

The finance ministry’s note on the new scheme is being put up to a group of ministers on pensions set up by the Prime Minister.

Although the head of the group, Planning Commission deputy chairman Krishna Chandra Pant, has favoured handing over the role of pension regulator to the insurance watchdog, the ministry wants an independent body. As a compromise solution, a separate wing could be created within the insurance regulator.

The finance ministry wants the regulator to be able to “craft modern investment regulations, which would pave the way for investment of pension assets in private bonds and shares”.

Pension funds interested in managing the scheme will have to be experienced and have a high capitalisation of at least Rs 100 crore.

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