ARE OUR PENSION LIABILITIES OVERESTIMATED?

Recently  an article has been written on 29/7/2021 by Mr R  Ramakrishnan,retired

Executive Director (Actuarial) of LIC on LIC Disinvestment.He has analysed the 

impact of the move on the shares  of the valuation surplus that will be received

by  the shareholders and policyholders after LIC's disinvestment    and has even 

given out his views on how it can be managed to the benefit of policyholders and 

shareholders.

Incidentally, I reproduce below an extract from the Annexure in his article 

describing the procedure of estimating the policy liabilities of the actuarial 

valuation before determining the Required Solvency Margin of the Corporation:

As at the end of a financial year, the value of policyholders' fund will be the     sum of,

·      The total liability as at the end of the year, as estimated by actuarial valuation,

·       Solvency Reserve,

·       Balance Fund.

The actuarial liability can only be estimated and cannot be determined exactly. The estimated liability will depend on many factors like expected rate of interest, rate of inflation, rates of mortality, provision for expenses, … etc. The assumptions made by the actuary regarding these factors will have some prudential margins and so the estimated liability will generally be higher than the theoretical, actual liability. The Required Solvency Margin, arrived at on the basis of this liability, will also be higher than the Solvency Margin actually required."

It is very clear from the above that while the annual actuarial valuation is conducted of the LIC employees' Pension Fund,that the factors adopted for the same will have some prudential margins and so the estimated liability will be generally higher than the expected  theoretical actual  liability.

So, when LIC submitted before the Delhi High Court that the upgradation for LIC pensioners will cost an estimated amount of  Rs 32500 crores,first thing,there were no supporting calculations produced.From what Mr Ramakrishnan writes,it means that while the estimate is actuarially correct, in actuality it is an overestimation.It goes without saying that the existing Pension Fund at Rs 70000 Cr as at 31/3/2020  must be also actually  more than  required.

But LIC is not the loser by keeping an excess amount in the Fund as the Fund is invested and earning interest thereon from year to year.Another advantage for LIC is that even the excess amount ,if any, ,after payment of pension by way of immediate annuities to pensioners is remaining only with LIC P & GS department along with the fund kept for other immediate annuities,  excess in which also earns interest on investment.

So it all boils down to this.Central Government pensioners receive pension with updation on 'Pay as you go' basis based on Central  Pay Commission Recommendations,without estimating and funding of the pension liabilities,while in case of LIC,pensioners receive an inadequate pension without updation in a funded scheme where the future  liabilities are overestimated on account of conservative actuarial assumptions while funding the liabilities.

It therefore follows that ,LIC Pension Rules 1995 being under a closed scheme for only employees recruited upto 31/3/2010, there is no likelihood of any adverse financial consequence for the LIC on account of upgradation of pension in the medium to long term.

We need to use the above points along with the article of Mr  R Ramakrishnan in support of our pleadings before the Supreme Court.

 

C H Mahadevan