FALACY OF FUNDING SCHEME ARGUMENT

THE FALLACY OF FUNDING SCHEME BEING AN OBSTACLE TO PENSION UPGRADATION 

 

We have seen the stock argument of LIC in our legal case both in Delhi High Court and also in the Supreme Court as revealed in LIC's Counter Affidavits  that the Pension Scheme for LIC employees is a 'funded scheme' while that for Central Government employees is a 'Pay as you go' scheme citing it as a reason for  the inability of the Corporation to pay upgraded pension.

There is a glaring fallacy  in the argument of the  LIC for various reasons.

First and foremost, both our Pension Scheme and the Central Government Schemes are defined benefit schemes with a definite legal obligation to pay such benefit to the pensioners.So the question arises as to whether a scheme is defined by  the  statutory legal obligations  which  an  organisation has to fulfil or  by the mechanism set up for meeting such obligations.

If the funding mechanism had not  been put in place ,would  not the statutory  obligations still remain to be fulfilled through some other mechanism even if it is not under 'Pay as you go'?

The funding mechanism with a prescription in the pension rules for  annual actuarial valuation of  liabilities eminently enables the monitoring of the scheme both in terms of actual experience as well as in terms of quantification of the liability every year for budgeting purposes.There have been some defence  of the Central Government system with the argument that the Government can take up printing of notes when faced with a deficit.When such a situation arises,what will happen to the financial health and monetary equilibrium of our country's economy?The ultimate sufferers will be the people at large due a surge in inflation that will result, as financial prudence would be  given a go by for expediency.

It is worth noting that due to the pressures  that ravaged   the economy due to the Covid pandemic. the Central Government brought in a moratorium on payment of increase in  Dearness Allowance for employees and on increase in  Dearness Relief for pensioners  for the period from 1/1/2020 to 30/6/2021.Such a freeze did not happen in the case of LIC employees and pensioners for the reason that LIC employees were protected by Gazetted wage revision Notifications while pensioners were protected by the LIC Pension Rules 1995 supported by a funded scheme.

The logic advanced so far by LIC has been demolished  the moment the Central Government approved the upgradation of pension for the RBI employees in March 2018 albeit with prospective effect while theirs is  also a funded scheme.

Secondly, even though it is a funded scheme in LIC for all pensionable employees, despite the funding, the provision for the  pay-out cannot be said to be taking place in an equitable manner.The PF surrendered had been on a uniform scale for all the employees, while the benefits paid to officers governed by Rule 55B are relatively higher than for  the other pensioners for the reason that they are paid out of the LIC Pension Fund the amounts of pension  as payable to Central Government pensioners which includes upgraded pension arising out of implementation of Central Pay Commission Recommendations once in every ten years.Even on an actuarial basis, there is a discrimination in the matter of determining additional contribution to the Pension Fund with a higher share in respect of officers covered by Rule 55B than that for  the employees not covered by that rule.With this kind of discriminatory dispensation, it  is untenable for LIC to argue that additional liability cannot be borne for upgradation of pension for pensionable employees.

Thirdly, the  funding scheme  for LIC pensioners is in two parts ,viz the one with the Pension Trust which mostly belongs to the serving employees and the other with the P & GS department of LIC with whom the Trust has purchased immediate annuities for payment of pension for retirees and family pensioners .The amount collected by the P & GS dept for payment to pensioners will be clubbed with that collected under immediate annuities in one fund and the advantages of such clubbing will flow to the LIC in the commercial sense.This is the advantage that is derived by LIC as an insurer selling immediate annuities at the same time funding for the Pension liabilities as an employer.

Thus we can be sure that the LIC Pension Scheme as a funded scheme is a beneficial arrangement for LIC rather than a hindrance to upgradation of pension.

In my view, the 'Pay as you go'  scheme is one of expediency and a  'Funded' scheme is one of  financial prudence.The added advantage for LIC as an insurer is the incidental commercial opportunity it provides as an immediate annuity scheme for a group of about 60000 pensioners that it administers.The number will go on increasing at least upto 2045,when more than 95% of the employees covered by the LIC Pension Scheme would have retired.The total number of serving  employees who are pension optees together with the pensioners may be about 1,50,000 as on date including those who have joined the Scheme after OMOP.So the Funded Scheme is a gainful proposition for LIC and no stumbling block for upgradation.

 

C H Mahadevan