Monday, January 9, 2012

The Aftermath of Structural Pension Reform: Managing Legacy Costs of Defined Benefit Pensions in India

India’s civil service retirement benefit system, based on a defined benefit scheme, imposed an annual expenditure of over $30 billion on the central and state governments. In an effort to truncate the unfunded scheme, which covers 30 million central and state government employees, the Government of India in 2004 decided to replace the traditional defined benefit scheme with a defined contributory scheme known as the New Pension Scheme.

This book contains an account of the efforts of five states—Assam, Bihar, Chhattisgarh, Jharkhand, and Madhya Pradesh—to estimate their current pension liabilities, project annual pension costs over the next 15–25 years, and explore options for managing their annual costs. Using newly constructed employee databases, the book discusses in detail the projections for each state and suggests cost-saving measures based on specific needs. Also included is a lengthy discussion of the lessons that emerged in database construction and practical recommendations in managing pension costs.

As part of an effort to control escalating civil service pension costs, the Government of India closed its defined benefit scheme (DBS) for pensions to new entrants on 1 January 2004. Civil employees hired on that day or after were and will be enrolled in a defined contribution scheme, the New Pension Scheme (NPS). Under this new scheme, the government and the civil servant each contribute 10% of the employee’s basic pay to a retirement fund, which is invested. At retirement, the balance of the employee’s retirement account, consisting of 20% of wages and all interest that accrued during the employee’s civil service career, is available to support the employee.

Employees hired before the NPS was included in notification letters of new employees remain in the existing DBS. Hence, the government is still liable for all payments to current pensioners and for the pensions and other DBS benefits of pre-NPS employees. Most such employees will retire within 30 years.

However, pensions to survivors and certain disability pensions will continue to be paid well beyond that. The government has encouraged states to follow its lead by closing their traditional DBSs to new entrants and by adopting defined contribution schemes like the NPS. Many states did move quickly to adopt defined contribution schemes; by the end of 2005, 15 had done so. However, little thought appears to have been given to the full implications of implementing a defined contribution scheme. Records need to be kept centrally and investments centrally managed according to enrollees’ choices; further, states are required to make all necessary information transfers regarding these investments as well as assign all contributions identifying information. States also did not appreciate the financial implications of the long-term phasing out of their DBSs. They did not realize how quickly and how high annual payouts under their DBSs are likely to grow as more civil servants move into retirement. Early studies indicated that costs could become alarmingly high before beginning to decline rapidly as the final cohorts of DBS retirees begin to die.

At the request of the government, the Asian Development Bank (ADB) agreed to assist a small group of states in estimating their DBS liabilities and in implementing their new defined contribution schemes.2 These states included Assam, Bihar, Chhattisgarh, Jharkhand, Kerala, and Madhya Pradesh. ADB provided financial support for a small group of experts to advise the states on construction of databases required to project current DBS pension liabilities.

After meeting with these experts, five of six states accepted ADB’s offer of assistance in developing two databases required for projecting annual DBS
pension outlays over the next 25 years and beyond.3 One of the databases would contain data on each current civil servant covered under the state DBS.The second would contain information on current pensioners.

ADB also agreed to advise states on implementing their new defined contribution pension schemes. Implementing these schemes requires collecting and
recording monthly contributions for each participant, matching employees with state contributions, and ultimately developing a system that can seamlessly
pass electronic records of NPS contributions to a central records agency and transfer information on enrollees’ investment choices to pension fund managers.
Finally, ADB financed the development of models to project DBS outlays on an annual basis and to provide insight into potential tools for managing DBS costs.
These also measured the impacts of various DBS reforms if these became necessary to avoid severe fiscal burdens during the period when DBSs would
be phasing out.

Asian Develoment Bank. Date: December 2011. Type: Books. Country:iNDIA. Subject: Social development and protection ISBN: 978-92-9092-491-3 (print), 978-92-9092-492-0 (web)

For more information about Projects in India see Southern Asia Projects


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