The Hindu Business Line : `State pension payout grows faster than revenue'

This is from the report of a study group appointed by the Reserve Bank of India to look into the growing pension liabilities of State Governments. The 15-member study group, was headed by Mr B.K. Bhattacharya, retired Chief Secretary to the Karnataka Government and Senior Fellow at IIM Bangalore. For some States, the growth rates in pension payments exceeded 30 per cent.

The steep increase in pension payments is attributed to the increase in the number of govt employees, extension of pension facilities to staff of local bodies, pay revisions, and significant improvement in life expectancy. The group notes that the committed expenditure on interest, salary and pension payments has already exceeded revenues, leaving nothing for development expenditure.

The study group estimates that pension payments of State Governments which were a little over Rs 28,000 crore in 2001-02 could touch Rs 1,88,000 crore in 2010-11, based on current trends. The group notes that most of the States did not provide an actuarial estimation of future pension liabilities.

The group recommends the need to make structural changes in the pension system, by moving to a defined contribution system from the defined benefit system existing now. But it concedes that the fiscal impact of such a change may be visible only after 35 to 40 years and therefore there is need for some parametric changes involving trimming of pension and retirement benefits.

For instance, with regard to leave encashment, State Government employees are entitled to encash up to 10 months of their accumulated earned leave. The group feels that this should be brought down to two months during an interim period and eventually do away with the concept of leave encashment itself.

Similarly, the group also recommends that the Governments adopt the basis of the average pay over a longer period, say 36 months, for computation of basic pension. Currently, many States follow the practice of working out pension on the basis of average of last 10 months or in some cases, the pay for last month of service. The group feels that this has provided scope for misusing the system through hasty promotions just prior to retirement to get higher pensionary benefits.

It suggests that some modification may have to be made even for existing employees and pensioners and hints that courts would be sympathetic if the States' financial position is properly explained. The group also recommends the setting up of "pension funds" and that it be kept completely outside the States' Consolidated Fund and Public Account, in order that its utilisation are only for pension purposes.

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