Private sector pension, the need of the hour

There have been several articles and news items covering the proposal of the Government towards the extension of the retirement age. This has compelled me to share my own thoughts covering this important aspect which will be of interest to many of the workforce.

In the recent budgetary proposal, it has been proposed to enhance the compulsory retirement age of all employees to 60 years inclusive of the private sector. The Government appears to have been motivated in taking this decision considering the prevailing high life expectancy of the people. It has been revealed at present the life expectancy of males is 72 years while for females it is reported to be 76 years. This may also result in the amendment of the existing Employees Provident Fund Act to comply with this new stipulation. It has been further revealed when the EPF Act was adopted the life expectancy was in the region of 57 to 58 years for both men and women. 

This proposal no doubt, will impact many of the workforce both in the public and private sector for a variety of reasons. Many of the employees looking forward to derive their EPF benefits will no doubt, be disappointed if they are deprived in deriving their EPF/ETF benefits at the earliest available opportunity. On the contrary, employees with a desire to continue with their work, retirement is the last thing they have in mind. The reasons are many. 

Firstly, it’s an undeniable fact society does not respect a retiree. A retiree will mentally be affected to lose the power and position they have enjoyed over the years, unless of course they are in a position to obtain an alternate employment which is not feasible under the present global pandemic. Many retirees will find it difficult to adjust to the new lifestyle in the absence of power and position. I should confess many of us have faced such eventualities. Retirement will also give an opportunity to identify one’s true friends.

If an opinion survey is taken among the workforce both in the public and private sector, I have no doubt a majority of them will opt to retire at the age of 60 years. The main impediment however, will be their inability to access their Employees Provident Fund/ETF. Many look forward to derive these benefits for various domestic and other compelling purposes, notably to meet their children’s marriage, education, investment, medical emergencies, etc.

With regard to the private sector most of the private sectors are guided by their own stipulations as per their respective Collective Agreements in some cases, which compels an employee to retire at the age of 55 unless they are able to obtain an extension of their service which will be at the sole and exclusive discretion of their management. This is an effective tool held by the employers to get rid of their unproductive resources which will be a burden for them and unlike the public sector they cannot afford to have unproductive resources which will affect their profitability in a competitive environment. The new proposal appears to compel all private sector employees to fall in line and continue with their employment up to the proposed compulsory age of retirement.

It has been reported in the media many unions mainly representing the workers in Free Trade Zones and other industries have expressed concern and have declared that whilst there is a pertinent need to raise the age of retirement in the private and semi government sectors towards establishing it statutorily, the age of retirement should be made optional and not mandatory to enable the employee’s right to access the funds from EPF/ETF. This is a justifiable concern. Employees with a desire to retire at 55 should be accommodated and only a very few may fall under this category.

Unproductive employees will always desire to work up to 60 years due to their inability to obtain alternate employment on retirement, while productive employees will desire to retire at the earliest opportunity due to their ability to obtain alternate employment. This proposal no doubt, will be a heavy burden on the public sector as they will be compelled to continue with some of their unproductive resources.

Private sector pension

It is reported proposals have also been made towards the introduction of Social Security for the Senior Citizens which is a commendable move. In 2011, the then Government made a genuine attempt to introduce a Pension bill to extend pension rights to the employees of the private sector. Unfortunately, this proposal had to be abandoned due to the vociferous protests made by certain sections of the society at that time.

The time, in my view is now opportune for the Government to consider re-introducing the legislation to extend pension rights to all private sector employees and the self-employed sector under the small and medium scale enterprises who are a neglected category. Daily paid wage earners, three-wheel operators, school van drivers, carpenters, masons, and other unskilled workers and individuals engaged in micro enterprises and other cottage industries, who silently contribute to the economy of the country should also be accommodated under this scheme as their future is very bleak. The moment they become invalid or incapacitated they lose their income and join the poverty line. They face tremendous challenges to survive once they become invalid. Many of us are personally aware of several such cases. 

There were many controversies and debates concerning the proposed bill at that time, which created a large amount of interest among the general public, especially among the working class; the main fear being that they will be deprived of their hard-earned EPF/ETF contributions which was not the factual position.

The then Government of 2011, at the very outset needs to be commended for taking the initiative in bringing in such a far-reaching legislation for the private sector employees as pension rights at present are enjoyed only by the state sector employees, in addition to certain other large private sector institutions such as a few leading private sector banks.

However, the trend in the recent past appears to be to move away from the pension scheme due to the heavy burden it imposes on each institution’s Pension Fund. The newly-recruited employees of these institutions, which previously offered pension rights, no longer enjoy these rights and certain employers of established Pension Funds have offered various incentives which is termed as ‘buy back’ as an incentive to move their employees away from the pension benefits with a view of reducing the burden on their Pension Funds.

This has resulted in a large number of employees opting to accept the ‘buy back’ of pension rights, which is considered to be an attractive incentive, instead of opting for the long-term benefit of having a monthly pension which no doubt is a regular dependable income.

In today’s context the youngsters are keen in opting for short-term benefits rather than opting for the long-term benefits as the short-term benefits appear to be attractive. Many of them lack an effective financial management or a plan to visualise their future when they reach the retirement age as they have no desire to contemplate of their retirement.

There are numerous instances of young employees moving away from their existing pensionable positions. This is the trend mainly in certain well-established banks and these young employees join certain young and emerging institutions mainly due to lucrative incentives offered without realising that they are foregoing a lifetime financial guarantee and security in the long run. In the banking sector this is a common phenomenon due to the highly competitive environment.

In yesteryears, there was a big demand for Government sector employees mainly due to the attractive incentives of the pension benefits derived by State sector employees. Being a Past President of a Pensioners Association in the banking sector I have been a strong advocate of the pension rights. I am personally aware of many employees who opted for the short-term benefits by foregoing their pension benefits are today faced with severe financial constraints due to the absence of any regular monthly income on reaching their retirement age. They have exhausted all their savings and are at the mercy of their children and friends. In addition, the falling interest rates have deprived them of a dependable regular income from whatever investments they may have made.

The Government should seriously consider the reintroduction of the Private sector Pension bill, which is a revolutionary one as it is rarely that a State intervenes in bringing in legislation to grant pension rights to private sector employees. The Government could create a ‘Pension Plus’ Fund to be managed exclusively by the State and all the aforesaid category of unskilled workforce should also be brought into this scheme by introducing an effective mechanism.

The many advantages of this legislation should be marketed to the prospective employees to avoid any fear psychosis which will naturally be created by interested parties. 

The main fear among the private sector employees will relate to the fear of losing their EPF and ETF, which is a compulsory saving and at the time of retirement one could expect a substantial sum. 

All pension payments should become payable when an employee reaches the proposed compulsory retirement age of 60 years. The pension should commence immediately on the employee reaching their retirement age of 60 without having to wait for any prolonged period as the retiree will find it difficult to survive during the intervening period without a regular dependable income. Effective mechanism should be in place at the Department of Pensions. 

The other day news media reported an instance where a pensioner had to wait for more than one year, visit the Pensions Department on more than 10 occasions to derive his pension which is reported to be still pending. There may be many such cases. Such instances should be avoided at all cost for which the Department of Pensions which has a major role to play should have an effective machinery.

At present when a private sector employee retires, they could expect to draw a substantial sum as lump sum payment from the EPF and ETF. Most of the retirees utilise this amount to meet certain compelling family commitments and a portion may go towards a fixed deposit as well with the intention of drawing a monthly income in the absence of a regular pension.

It is pertinent to mention here the previous Yahapalana Government introduced an unfair stipulation to the EPF Act which prevents an employee drawing the EPF funds unless a period of five years has been completed from the previous drawing, irrespective of their age. In other words, if an employee after retirement joins an entity for a short duration as a consultant or on a short-term employment, he or she cannot withdraw the EPF funds unless a period of five years has been completed from the previous drawing. This is a very unjustifiable stipulation. There may occur instances, where a retiree may join an organisation on short-term contract and such employees are deprived in drawing their EPF funds unless at the expiry of a period of five years from the previous withdrawal. No such stipulation applies for ETF after the age limit of 60 years. 

In today’s context with the falling interest rates, one cannot expect a substantial amount as interest income and given a choice most will no doubt prefer a regular dependable income, which of course is the pension.

Under the existing scenario a retiree should have at least a sum of Rs. 7 million in a deposit account to derive a monthly income of Rs. 30,000 and this is yet not a dependable income due to the falling rate of interest which at present is on a decreasing trend. All their living expenses, utility payments and medical expenses have to be met out of this income. Situations may also arise which will compel them to draw from their investments which will result in the reduction of their income. The existing senior citizens interest payment of 15% offered by the Government which is restricted to 1.5 million is hardly adequate to meet the expenditure of a senior citizen many of whom have to incur substantial expenditure on their medical emergencies.

Marching towards the poverty line

The young employees have to be educated of these important factors. Many retirees who have exhausted their EPF funds are today marching towards the poverty line as in certain cases they have been neglected by their loved ones on whom they reposed all their trust and confidence.

If the advantages of this scheme are explained to the general public and the concerned employees, I have no doubt most will opt to contribute towards the pension fund. I am of the opinion the authorities should effectively market this to the public, to avoid any suspicion which may arise in the minds of the people, especially the private sector employees, most of whom mainly the youngsters may not be in a mood to talk or hear the word pension. 

According to the Sri Lankan culture, most children normally take the responsibility of caring for their aged parents on their reaching an unemployable age having lost their earning capacity. However, this phenomenon does not exist in general as we have many experiences and instances where in certain isolated cases they have been abandoned by their kith and kin on losing their earning capacity when the aforesaid realise they are a burden to them and the society at large.

In many Western countries, however, there are elders’ homes specially run with government aid to take care of such aged parents and most of them lead a happy and contended life. The situation is different here in our country as we have very limited institutions of the aforesaid category most of which are beyond the reach of the ordinary senior citizen. This makes a compelling reason to have a regular pension which is a security and a guarantee for the aged senior citizens. 

In addition, a pensioner from an established fund could expect periodical increments, and in some cases, medical benefits. This additional incentive is not available if the money is invested in a term deposit due to the prevailing decreasing trend of interest rates. In addition, the pension fund also ensures that the dependents of the pensioner are taken care of in case of any unforeseen circumstance as many are additionally covered by the Widows and Orphans Pension Scheme as well. The Widows and Orphans Pension Scheme should also be linked to this scheme since it will not only provide an additional incentive to the employee but also ensure the dependents are taken care of on the unfortunate demise of the pensioner.

Going forward the Government should encourage healthy debates and discussions with all stakeholders, i.e., the employers, employees, trade unions, academics and all other political parties of divergent views and explain the advantages of having a pension and market this to the employees. The majority of the employees may not understand the benefits they could derive in having a pension at their retirement as the tendency is to go for short-term benefits which are always attractive.

I am confident if the proposal is effectively explained to the relevant parties through the media, a majority of them will have no hesitation in opting to join such a scheme.

There are a few leading insurers who provide pension scheme under a well-planned contributory insurance scheme. However, the reality is the monthly payment derived from such schemes on maturity, will hardly be adequate to meet even the utility payments of the pensioners. However, in reality many of the contributors abandon the scheme halfway due to financial constraints and the amount which they have contributed goes waste as the insurer may not in certain cases refund the premium paid on such schemes.

The Government should reconsider the introduction of this far-reaching legislation as it will offer immense benefits to the private sector employees and what needs to be done is to rectify all grey areas with the active participation of all stakeholders.

This will offer numerous advantages to the employee on retirement and will provide them financial security and peace of mind during their retirement, hence I feel it will be a laudable move to provide this facility to the private sector employees and prior to the submission of the bill the authorities should educate the public of its advantages and include all stakeholders, which will result in the plain sailing of the bill.

Pension helps to maintain the standard of one’s lifestyle even after retirement and provides a sense of an independent financial security, free of any worries and most importantly peace of mind without the necessity of dependence on anyone.

Let us hope the Government and the relevant authorities give serious consideration towards the introduction of an effective pension scheme to all private sector employees inclusive of the unskilled workforce.