Startled?
Bitter but true. It is a harsh reality that the Government has made a
profitable business out of the apparently innocuous ‘welfare measure’
called “Commutation of Pension”. Calculations show that the Government
recovers much more than the amount it extends ostensibly as a welfare
measure to the retiring personnel. The main reason projected by the
Government for excess recovery is the ‘mortality risk factor’ as the
balance recovery is waived in case of death. The hard fact remains that
commuted pension is like any other advance/ loan on which the Government
charges interest (currently 8%) at market rate! The Government keeps on
chewing on the pension for 15 years though it recovers the full amount
with interest in 10 years and 10 months (in case of post-1.9.08
retirees). In the case of earlier retirees, it fully recovers in less
than 13 years.
As
per extant rules [Central Civil Services (Commutation of Pension)
Rules, 1981], commuted pension is restored 15 years after the date of
drawal of the commuted amount. This period of 15 years is arbitrarily
fixed, without any legal or mathematical basis. This amounts to an
unjust and immoral enrichment of the Government at the cost of the
pensioners/ senior citizens. This affects all the services, irrespective
of the rank/ level of the pensioner. What right/ justification has the
Government got to overcharge the pensioners and recover even a penny
more than what it has paid? The Government is behaving like a typical
rural money lender and is knowingly milking the pensioners.
In
the succeeding paragraphs, I will mathematically and legally prove how
the pensioners are being fleeced. The calculations, made on the basis of
one particular pay, are only illustrative but the principle/ method
applies equally to all the ranks, leading to exactly similar results.
Retirees between 1986 and 1995
The
age of retirement during this period was 58 years. Such retirees have
all completed the prescribed period of 15 years for restoration of
pension. Since 1.3.1971 and until 1.9.2008, the Commutation Factor (CF)
was 10.46 and the rate of interest was 4.75% p.a. Commutation allowed
was 1/3rd of the basic pay. The basic pension of those who superannuated
between 1.1.86 and 31.12.95 at the top of their pay scale (Rs.8,000),
was fixed at Rs.4,000 and they got commuted pension of Rs.1,67,318 with a
deduction of Rs.1,333 per month. The principal amount of Rs.1,67,318
was fully recovered in 10.46 years.
- Considering
the simple interest rate of 4.75% p.a., the total interest works out to
Rs.36,250. This was fully recovered in 2.27 years [36250/1333 = 27.2
months or ~2.27 years]. Thus, total recovery period of the commuted
amount works out to 10.46 + 2.27 = ~12.73 years. But the pensioner was made to pay for additional 15 – 12.73 = 2.27 years, amounting to Rs.36,250.
Retirees between 1996 and 2005
The
age of retirement was raised to 60 years w.e.f. 1.5.98 after the 5th
Central Pay Commission (CPC) report. Permissible commutation was also
raised from one third to 40% of the basic pay w.e.f. 1.1.96. The
Commutation Factor (CF) came down to 9.81 from 10.46. The rate of
interest was 4.75% p.a. Those who superannuated between 1.1.96 and
30.4.98 at the age of 58 years at the top of their pay scale (Rs.26,000)
got the commuted amount of Rs.6,52,704 with a deduction of Rs.5,200
p.m. Those who retired between 1.5.98 and 31.3.04 at the top of their
pay scale (Rs.26,000) got the commuted amount of Rs.6,12,144 with a
deduction of Rs.5,200 p.m. Those who retired on or after 1.4.04 after
the merger of 50% DA with basic pay got Rs.9,18,216 with a deduction of
Rs.7,800 per month.
- Retirees
between 1.1.96 and 30.4.98:- The principal amount of Rs.6,52,704 was
fully recovered in 10.46 years. Considering the simple interest rate of
4.75% p.a., the total interest worked out to Rs.1,50,779. This was
recovered in 2.42 years [150779/5200 = 29 months or 2.42 years]. Thus,
total recovery period of the commuted amount works out to 10.46 + 2.42
= 12.88 years. But the pensioner kept on paying for further 15 – 12.88 = 2.12 years. Excess recovery was Rs.1,32,517.
- Retirees
between 1.5.98 and 31.3.04:- The principal amount of Rs.6,12,144 was
fully recovered in 9.81 years. With interest rate of 4.75% p.a., the
total interest works out to Rs.1,41,409. This is recoverable in 2.27
years [141409/5200 = 27.2 months or 2.27 years]. Thus, total recovery
period of the commuted amount works out to 9.81 + 2.27 = ~12.08 years. But the pensioner kept/ keeps on paying for further 15 – 12.08 = ~2.92 years. Excess recovery = Rs.1,82,447.
- Retirees
between 1.4.04 and 31.12.05:- The principal amount of Rs.9,18,216 has
already been fully recovered in 9.81 years. With the simple interest
rate of 4.75% p.a., the total interest works out to Rs.2,12,114. This is
recoverable in 2.27 years [212114/7800 = 27.2 months or 2.27 years].
Thus, total recovery period of the commuted amount works out to 9.81 +
2.27 = ~12.08 years. But the pensioner will keep on paying for further 15 – 12.08 = ~2.92 years. Excess recovery = Rs.2,73,670.
Retirees from 1.1.2006 to 1.9.2008
Since
1.3.1971 and until 1.9.2008, the Commutation Table remained unchanged.
The Commutation Factor (CF) in 2006-2008 was 9.81 and the rate of
interest was 4.75% p.a. The basic pension of those who superannuated
between 1.1.06 and 1.9.08 at the top of their pay scale (Rs.80,000), was
fixed at Rs.40,000. Their commuted pension amount was Rs.18,83,520 with
a deduction of Rs.16,000 per month. The principal amount is fully
recovered in 9.81 years.
- Considering
the simple interest rate of 4.75% p.a., the total interest works out to
Rs.4,35,106. This is recoverable in 2.27 years [435106/16000 = 27.2
months or 2.27 years]. Thus, total recovery period of the commuted
amount works out to 9.81 + 2.27 = 12.08 years. But the pensioner will keep on paying for further 15 – 12.08 = 2.92 years. Excess recovery = 2.92 x 12 x 16000 = Rs.5,60,640.
Retirees with effect from 2.9.2008
This
category of pensioners is the worst affected. They suffered a triple
jeopardy: (i) 16.5% lower commuted amount (ii) 68% higher interest and
(iii) status quo in recovery tenure. The persecution is explained below.
A
new Commutation Table was introduced from 2.9.08 which reduced the
commuted amount drastically without reducing the recovery tenure.
Despite a sharp rise in life expectancy, the Commutation Factor (CF) was
downgraded from 9.81 to 8.194, thereby reducing the commuted amount by a whopping 16.5% !!! To add insult to injury, the rate of interest was enhanced from 4.75% to 8% p.a.,
an astronomical jump of 68% even in this low interest regime !!! This
category of pensioners suffered the costliest advance/ loan called the
‘commuted pension’.
The
basic pension of those who superannuated on or after 2.9.08 at the top
of their pay scale (Rs.80,000) was fixed at Rs.40,000. Their commuted
pension amount is Rs.15,73,248 with a deduction of Rs.16,000 per month.
Had the Commutation Table not been revised, they would have got a higher
commuted sum of Rs.18,83,520 as per the old CF of 9.81. Thus, they
were/ are put to the first shock loss of Rs.3,10,272 (-16.5%) at the outset, even before the recovery started/ starts !!!
- Coming
to the recovery part, the principal amount of Rs.15,73,248 will be
fully recovered in 8.194 years. With interest @8% p.a., the total
interest works out to Rs.5,10,417. This is recoverable in 2.66 years
[510417/16000 = 31.9 months or 2.66 years]. Thus, total recovery period
of the commuted amount is = 8.194 + 2.66 =10.85 years. But the pensioner will keep on paying for further 15 – 10.85 = 4.15 years. Excess recovery = 4.15 x 12 x 16000 = Rs.7,96,800.
The following tables summarise the comparative position:-
Sl.
|
Retirement Period & Age
|
Commutation Factor
|
Interest
(% p.a.)
|
Basic Pension
|
Commuted Amount
|
Monthly Recovery
|
|
1986 to1995;
58 years
|
10.46
|
4.75
|
4,000
|
1,67,318
|
1,333
|
|
1.1.96 to 30.4.98;
58 years
|
10.46
|
4.75
|
13,000
|
6,52,704
|
5,200
|
|
1.5.98 to 31.3.04;
60 years
|
9.81
|
4.75
|
13,000
|
6,12,144
|
5,200
|
|
1.4.04 to 31.12.05
60 years
|
9.81
|
4.75
|
13,000
|
9,18,216
|
7,800
|
|
1.1.06 to 1.9.08;
60 years
|
9.81
|
4.75
|
40,000
|
18,83,520
|
16,000
|
|
2.9.08 onwards;
60 years
|
8.194
|
8
|
40,000
|
15,73,248
|
16,000
|
Sl.
|
Retirement Period
|
Commuted Amount + Interest (Rs.)
|
Recoverable in
|
Actual Recovery in 15 years
|
Excess Recovery (Rs.)
|
|
1986 to1995
|
2,03,568
|
12.73 years
|
2,39,940
|
36,250
|
|
1.1.96 to 30.4.98
|
8,03,483
|
12.88 years
|
9,36,000
|
1,32,517
|
|
1.5.98 to 31.3.04
|
7,53,553
|
12.08 years
|
9,36,000
|
1,82,447
|
|
1.4.04 to 31.12.05
|
11,30,330
|
12.08 years
|
14,04,000
|
2,73,670
|
|
1.1.06 to 1.9.08
|
23,18,626
|
12.08 years
|
28,80,000
|
5,60,640
|
|
2.9.08 onwards
|
20,83,665
|
10.85 years
|
28,80,000
|
7,96,800
|
In a nutshell, the commuted pension is fully recovered with interest in:-
- 12.73 years in case of those who retired between 1986 and 1995;
- 12.88 years in case of those who retired between 1.1.96 and 30.4.98;
- 12.08 years in case of those who retired between 1.5.98 and 1.9.08;
- 10.85 years in case of those who retired on or after 2.9.08.
Supreme Court Order of 1986
All
the time, the Government is harping upon the Supreme Court Judgement of
9.12.86 in Common Cause Vs. UOI in Writ Petitions No. 3958-61 of 1983
under Article 32 of the Constitution of India. The justification given
by the Government for excess recovery is two fold: (i) convenience of
lump sum payment to pensioners and (ii) mortality risk factor. It is
almost 29 years since the SC judgement was delivered while much water
has flown down the Ganges since then. Several factors and circumstances,
which were relied upon by the Apex Court, have undergone a sea change
as elaborated in the analysis below:-
1)
As per an official release, the life expectancy in India currently is
67.3 years for males and 69.6 years for females. The average comes to
68.5 years. In 1986, when the Supreme Court judgement was delivered,
life expectancy in India was only 57 years while the retirement age was
higher than this (58 years). In 29 years after the judgement, there is a
sharp upsurge in life expectancy by 11.5 years while the retirement age
(60 years) is 8.5 years lower than the life expectancy of 68.5 years!
This has reduced the projected risk factor (of non-recovery and waiver
due to premature mortality) to almost zero. This factor alone demolishes
the Government’s constant bogey of mortality risk factor.
2)
Even if a pensioner dies at the average life expectancy age of 68.5
years and the unrecovered commuted amount stands waived off, the
Government is not a loser at all. The reason is that the family pension,
which remains 100% only up to 7 years after retirement, i.e. up to the
deceased’s presumed age of 67 years, is reduced thereafter by 40% after
the death of the pensioner. This drop is exactly the same as the current
commuted portion which is 40% of the basic pension. Thus, in the
changed scenario, virtually no risk factor exists.
3)
When the age of retirement was raised from 58 to 60 years after the 5th
CPC in 1996, the Commutation Factor (CF) came down to 9.81 from 10.46,
thus lowering the financial liability of the Govt by 6.2% (though this
drop was almost offset by the increase in the commuted value from
33-1/3% to 40% effected after the 5th CPC).
4)
As mentioned earlier, with effect from 2.9.08, a new Commutation Table
was introduced which drastically reduced the commuted amount by as much
as 16.5% because of the reduction in the CF from 9.81 to 8.194. Though
the Government’s financial liability towards the commuted amount came
down by 16.5%, the period of recovery was not reduced though it should
also have been brought down proportionately by 16.5%, i.e. by 2.5 years.
Thus, logically, even if we ignore other factors, the recovery period
should have been brought down to 15 – 2.5 = 12.5 years.
5)
Apart from revising the Commutation Table, the rate of interest was
raised w.e.f. 2.9.08 from 4.75% to the market rate of 8% which is almost
double the previous figure. Thus, calling the commuted pension a
concessional dole and a welfare measure is no more valid. The Government
is claiming its full pound of flesh even in this low interest regime.
In such a situation, why should the Government recover more than what it
has advanced?
6) A relevant portion of the SC judgement of 1986 is cited below:-
| “In
dealing with a matter of this nature, it is not appropriate to be
guided by the example of Life Insurance; equally unjust it would be to
adopt the interest basis. On the other hand, the conclusion should be
evolved by relating it to the ‘years of purchase’ basis. An addition of two years to
the period necessary for the recovery on the basis of years of purchase
justifies the adoption of the 15 years rule. That is more or less the
basis which appears to be equitable”. |
This has two inferences:-
a)
No link of the concept of commutation can be made to life insurance.
This demolishes the official stand that an element of insurance/ risk is
made into the concept of commutation.
b)
The period of recovery for interest cannot exceed 2 years after the
recovery of the principal amounton the basis of years of purchase. This
leads to the following recovery periods for different retirees:-
Sl.
|
Retirees Between
|
Principal Amount is Recovered in
(Years of Purchase)
|
Total Recovery Period after Adding 2 Years for Interest Recovery
|
|
1986 to1995 and up to 30.4.98
|
10.46 years
|
12.46 years
|
|
1.5.98 to 1.9.08
|
9.81 years
|
11.81 years
|
|
2.9.08 onwards
|
8.194 years
|
10.194 years
|
7)
The Government’s argument that the period of 15 years was “fixed” by
the Supreme Court is fallacious and misleading. A plain perusal of the
judgement shows that this period was proposed by the Government itself
during the pendency of the Writ Petition (as an offer of compromise) and
the figure was simply accepted by the Court. No calculation chart was
ostensibly submitted either by the Government or by the Petitioner to
justify the proposal of 15 years but it was welcomed by all because till
then, the recovery period was life long.
8)
A perusal of the judgement shows that 15 years is the upper limit while
there is no lower threshold fixed. No bar has been placed by the Court
on its reduction which can always be done in view of the changed
circumstances like higher life expectancy, lower risk factor, revised
commutation table, reduced commutation factor, increased interest rate,
higher age of retirement and the changed scenario after the 4th, 5th and
6th Central Pay Commissions.
5th CPC Recommendation Rejected by the Government
The
5th Central Pay Commission, in Chapter 136, had specifically
recommended reduction of the period of recovery to 12 years. The
Commission had observed that the commuted value of pension receivable
currently by an employee retiring at the normal age of 58 years was
equal to 10.46 years’ purchase. It was, however, separately recommended
that the age of superannuation be raised from 58 years to 60 years.
Consequently, the commutation value in respect of employees
superannuating at the age of 60 years and commuting a portion of pension
within a period of one year would be equal to 9.81 years’ purchase.
After adding thereto a further period of 2 years for recovery of
interest in terms of the observation of the Supreme court, it was felt
reasonable to recommend restoration of the commuted pension after 12
years. The Government rejected this recommendation summarily, without
citing any plausible reason despite the Commission having given sound
reasons for the same.
Summary
Keeping
in view all the factors and mathematical calculations, the exact period
of restoration of commuted pension works out as under:-
a) 1st category of retirees (who retired between 1986 and 1995): They repaid the entire amount with interest in 12.73 years. The Government should refund the excess recovery made for 2.27 years with interest.
b) 2nd category of retirees (who retired between 1.1.96 and 30.4.98): They repaid the entire amount with interest in 12.88 years. Excess amount recovered for 2.12 years should be refunded with interest.
c) 3rd category of retirees (who retired between 1.5.98 and 1.9.08): Their repayment completes in 12.08 years. Therefore, their full pension should be restored thereafter. Excess amount recovered should be refunded with interest.
d) 4th category of retirees who retired on or after 2.9.08: Their repayment completes in 10.85 years. Their full pension should be restored thereafter.
The Forum of Retired IPS Officers (FORIPSO) gave a Power Point Presentation before the 7th Central
Pay Commission last year and was able to convince it. These facts were
also brought to the attention of the Government but these fell on deaf
ears, forcing FORIPSO to file a PIL in Delhi High Court where it is
pending.
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