Thursday, September 29, 2011

Why the New Pension Scheme (NPS, for short) has made nervous and terrified every Railway Employee appointed on or after 01.04.2004?

The answer is very simple.
Now there is a situation where every month the recovery from the employees’ salary is certain. Similarly with regard to the quantum of deduction from the employees’ salary every month is also well defined-that is 10% of Basic Pay + DA.
But what is uncertain and undefined is the quantum of ‘Pension’ the employees will get on superannuation/retirement.
No wonder it is extremely scary for the Government Servants appointed on or after 01.04.2004.
In the old Pension Scheme applicable for the employees appointed prior to 01.4.2004 the pension is certain and with regard to quantum it is well defined and assured. In the old pension scheme the well defined and certain quantum of pension is 50% of the last salary (Basic Pay + DA) drawn.
Thus in the old scheme both contribution and benefit were defined. But in the NPS benefit is not defined as 40% of the employees’ accumulated contribution over the years of service will be left to the Provident Fund Managers (PFM) whims and fancies.
The questionable new pension scheme is introduced for all new entrants in Railways from 01 Jan 2004 and it has become mandatory for new recruits who joined the Railways as Railway Servants on or after 01.01.2004. The excising Railway Services (Pension) Rules 1993 that includes commutation of Pension Rule, Extraordinary Pension Rules and State Railway Provident Fund Rules will not be applicable to the new recruits. And getting onto the NPS, it consists of two options called as Tier-I & Tier-II.
In ‘Tier-I’ the Railway servant shall compulsorily make a contribution at the rate of 10% of Basic Pay plus DA. A matching contribution will be made by the Government paving way for ‘wealth-creation’ at the time of retirement. This amount is not liable for withdrawal by the employee but qualify for variable interest that will be fixed by the Government.

‘In Tier-II’ optionally Railway servant may have an account. The Government will not make any contribution. The Railway servant is free to withdraw part of or whole of the Tier II of his money at any time.
1.     No withdrawal facility at any circumstance in TIER -1.
2.     When the Railway servant retires after attaining the age of 60 years, it would be mandatory to invest 40% of the amount in Tier-I account to purchase an annuity (annuity is a technical term meaning PENSION) from a Life Insurance Company. The insurance company will provide pension for the entire life time of employee and his dependent.
3.     The remaining 60% of the amount in Tier-I account is given to the Railway servant reaching superannuation after 60 years and he can utilize the amount in any manner.
4.     If the Railway servant leaves the Railway  before 60 years of age for any reason like VRS, 80% of the amount in Tier-I account should be invested in the Insurance company and the balance 20% alone will be given to the employee.
5.     In case of the death of the Railway servant the accumulated fund in the Tier-I account will be paid to the spouse or children or dependent or parents as per the nomination executed under the scheme.
6.     Pension Fund Regulatory Development Authority (PFRDA) will issue the license to PFM. Further the PFM is eligible for 1.5 % service tax when the employee retires. Pension Fund Managers (PFM) will deposit the money to share market.
Apparently it is a very tricky situation for the employee as Speculation rules New Pension Scheme. Instead of this speculative pension an assured Pension is prudent. At the age of sixty and above, the speculation factor will destroy settled life causing tension and perpetual anxiety.
It is wise to recall a good old adage at this juncture:
 “A bird in the hand is better than two in the bush.”
Therefore a method should be emulated to provide the scheme a guarantee. There should be some guarantee of certain amount of minimum pension. Presently 50% of the last pay drawn plus ‘DA applicable as on the date’ is paid as pension to the employee. So this factor shall be incorporated in the NPS adequately. Anyhow to follow suit with changing economic dimensions a NEW PENSION SCHEME is being evolved jeopardizing  the social/ economic security of the employee and therefore a favorable clause shall be incorporated so that the employee’s interests are protected and given utmost importance.
Hence NREU urges that the pension in the new NPS shall be as under.
a)     Fifty percent of the last pay drawn (as is the case in the existing scheme.)
b)     The sum worked out by the PFM,
c)     Which ever is more (of clause a and b above).
Dear Comrades,

The above is the draft memorandum for submission to Railway Minister.

Kindly send by e mail your views if you wish to modify the draft memorandum.

Comradely yours,

Legal Adviser/NREU.
e mail:


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