Contributory pension plan to be revived to ease govt burden

- PRITHVI MAN SHRESTHA, Kathmandu
Contributory pension plan to be revived to ease govt burden

Jun 23, 2014-

The government has revived plans to launch a contribution-based pension system as pension payments have been ballooning with more and more state employees becoming eligible for retirement putting a strain on its finances.

A senior official at the Finance Ministry involved in making the budget said that a contribution-based pension system would be announced in the government’s next annual financial plan.

With pension payments rising and Nepalis living longer, Finance Minister Ram Sharan Mahat has been speaking in favour of introducing the contribution-based pension system to ease the government’s burden.

“Under the new pension system, government employees will be eligible to draw pensions only after reaching a certain age,” said the Finance Ministry official, adding that the age has not been fixed yet. Currently, civil servants retire after reaching 58 years age or completing 20 years of service.

The pension scheme is being rolled out for the second time after the previous attempt failed.  Since 2002-03, the government had introduced a contributory pension system for newly recruited civil servants.

The government had collected 10 percent from employees and 10 percent from the government, which was deposited in the Citizen Investment Trust for four years until 2005-06.

But the government rolled back the system following intense pressure from employee unions after the People’s Movement II in 2006. The government withdrew the collected amount, scrapping the system. The government’s attempt to introduce Pension Fund Act through the Parliament was also rejected after the restoration of democracy in 2006 and another bill on Pension Fund was stuck at the Cabinet.

Former Finance Secretary Rameshwar Khanal said based on the recommendation of the Government Budget Management and Expenditure Framework Review Commission led by then lawmaker Binaya Dhwoj Chand, the government had amended the Civil Service Act to form the fund.

In the fund, the government first gave an extra 10 percent to civil servants’ basic salary which was put into the fund by addicting another 10 percent from the government. The government has allocated Rs 26.91 billion for pension and disability allowance in the current fiscal year’s budget. An examination of the trend of the last few years shows that retirement benefits have risen massively.

The budget allocated for pension was Rs 23.97 billion in the last fiscal year.  Meanwhile, pension payments have increased three-fold over the last five years. The government had allocated just Rs 10.09 billion for pension payments in fiscal 2009-10. Civil servants, teachers, military servicemen and policemen draw a pension. A huge number of government staff are retiring every year with 2,216 employees due to leave this fiscal year, said Nijamati Kitab Khana.

As per current legal provisions, the wife and minor children (under 18 years of age) of government employees will receive pensions in the event of their death. They receive a full pension for seven years and half of that amount after that.

Khanal said if pension expenses continue to grow at the current rate, a day may come when the government can no longer pay pension. “Next generation of government employees may face such problems,” he added.

The Government Budget Management and Expenditure Framework Review  Commission 2009 led by former lawmaker Narayan Dahal has also stated that the current non-contributory system would invite a huge financial burden on public funds.

This is because the number of government employees has been increasing, and when their salary goes up, the pension also goes up by an amount equivalent to two-thirds of the raise. “If appropriate resources for this purpose are not generated, public finance management will head towards a crisis,” the commission report said.

The commission report has estimated the cost of pension until fiscal year 2030-31. As per its estimates, the cost of pension will reach Rs 39.96 billion in fiscal 2030-31. However, it may be greater than that amount as the allocation for pension has already reached Rs 26.91 billion during this fiscal year against the commission’s projection of Rs 14.73 billion.

Bodh Raj Niraula, who worked as member secretary of the commission, said that without making the pension system contributory, it will not be sustainable.

Currently, the government cannot estimate the amount of resources necessary for future pension payments as there are no cut-off dates. “This has posed a challenge to generate resources for pension purpose,” he added.

Niraula also suggested that it would be better to provide the money for pensions to institutions like the Employees Provident Fund to ensure that they are distributed regularly and the amount is used to earn interest.

Published: 24-06-2014 09:24

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