Private sector pension scheme and its benefits

The draft Pension Bill of the Government, even before it could be debated in Parliament, resulted in the death of an unfortunate youth who appears to have got caught to the crossfire.

There have been many controversies and debates concerning the proposed bill, which has created a large amount of interest among the general public, especially among the working class, the main fear being that they are to be deprived of their hard-earned EPF/ETF contributions.

Being the President of an association of pensioners, I know the importance and value of a monthly pension; hence I am motivated in expressing my views.

The Government 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 hitherto are being enjoyed only by the State sector employees in addition to certain other private sector institutions such as a few leading 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 individual 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 incentive which is termed as ‘buy back’ to move the employees away from the pension rights with a view of reducing the burden on their pension fund.

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 are highly attractive. Many of them do not have an effective financial management or a plan to visualise their future when they reach the retirement age as they do not want to think of retirement and feel they have a long way to go.

There are numerous instances of young employees moving away from their existing pensionable position. 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, parents were eager to give their daughters in marriage to Government sector employees mainly because of the attractive incentive of the pension benefits derived by State sector employees. I have been a strong advocate of the pension rights and am personally aware of many employees who opted for the short-term benefits by foregoing their pension benefits are today faced with severe financial difficulties due to the absence of any regular monthly income as they reach their retirement age.

There have been several articles and debates on the pros and cons of the Pension Bill. The Government in my view should not abandon this piece of legislation 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 many advantages of this legislation do not appear to have been marketed to the prospective employees as a fear psychosis appears to have been created among the working class which is unfortunate. What is this fear? That the Government is going to take away their EPF and ETF savings.

The main fear among the private sector employees relates 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. Let us examine some of the proposals of the bill: 2% of the gross earnings of the employee to be contributed monthly to the fund by the employee and the employer;

Proposed pension benefits: 10 years and less than 20 years of contribution 15% of the last drawn salary as the pension; contributions less than 30 years 30% of the last drawn salary as pension; contributions of 30 years and over 60% of the last drawn salary as pension

However, it appears all pension payments will become payable when an employee reaches the age of 60 years irrespective of the age of retirement. This no doubt will be of a major concern for the retirees since if an employee retires at the age of 55 as it happens in a majority of cases, such retirees may have to wait for another five years to draw their pension.

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 retires utilise this amount to meet certain compelling family commitments and a portion goes to a fixed deposit as well with the intention of drawing a monthly income in the absence of a regular pension.

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. 5 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 rates of interest. All their living expenses, utility payments and medical expenses have to be met out of this income.

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 children on whom they reposed all their trust and confidence.

In my view the proposed bill is a commendable piece of legislation. However, the employee should be given the option to decide and it should be voluntary and not compulsory. i.e., whether they want to draw the EPF balance in full or opt for a monthly dependable income, the obvious answer being the pension.

If the advantages of this scheme are explained to the general public and the concerned employees, I have no doubt most will opt to accept the pension. I feel the authorities have not marketed this to the public, which has resulted in the creation of certain amount of suspicion in the minds of the people, especially the private sector employees, most of whom are not in a mood to talk or hear the word pension now.

The pension should commence immediately on the employee reaching their retirement age and not at the age of 60, which in my view is unreasonable and unrealistic. The retiree will find it difficult to survive during the intervening period without a regular dependable income.

According to the Sri Lankan culture, most children normally take responsibility of caring for their aged parents on their reaching an unemployable age and 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 for 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. This additional incentive is not available if the money is invested in a term deposit due to the prevailing fall 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.

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 sell this to the employees. The majority of the employees do 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.

The proposed pension in my opinion should be voluntary and the employee should be given the option either to join the scheme or to remain committed to the existing EPF benefits. I am confident if the proposal is educated to the relevant parties through the media, a majority of them will have no hesitation in opting to join such a scheme.

The payment of pension benefits should become payable to the retiree on their reaching their retirement age which is 55 or 60 as the case may be. It is said according to certain population projections the category of senior citizens above the age of 60 is expected to rise substantially within the next decade.

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.

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 and ensure the dependents are taken care of in the unfortunate demise of the pensioner, but will also prevent the necessity to refund the contributions.

The pension scheme offers numerous advantages to the employee on retirement and provides them financial security and peace of mind during their retirement, hence I feel it is 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.

The Government should not altogether abandon 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.

(The writer is the current President of the HNB Retired Employees Association and is a consultant in banking/visiting lecturer.)