More labour pains

The new labour minister, K Chandrasekhar Rao, has done well to sensitise workers to the need to bring more flexibility into the country’s labour laws to, as he put it, “adjust our social protection strategy to contemporary circumstances”.

While this suggests an encouraging awareness of current realities, Mr Rao’s observations at the 40th session of the Standing Labour Committee are more worrying.

When asked whether interest rates on money with the Employees Provident Fund (EPF) would be raised, he said the Left allies would be consulted—in other words, there is not even the pretence any more that the EPF is professionally managed or that such decisions are based on mundane details like returns on investments made.

Since one of the first public policy pronouncements by Dr Manmohan Singh was a statement that the EPF shouldn’t be made to go the UTI way (by promising absurdly high returns), it is doubly unfortunate that Mr Rao should make such an irresponsible statement—for he must have known that some trade unions have been demanding an interest rate of 12 per cent, when the fund is earning no more than 8 per cent.

What should be worrying the new labour minister even more than the hole in the provident fund’s accounts is the other part of the EPFO, the Employees Pension Scheme (EPS).

The EPS is a problem that gets compounded many times over with each fluctuation in interest rates, for the simple reason that the end benefit remains fixed—an annual pension till the end of your life that is roughly equal to the average monthly salary drawn during the last year of employment, and then half that for your spouse after your death.

Some newspaper reports have put the shortfall on this account at Rs 15,000–17,500 crore. While this is an exaggeration since actuarial shortfalls are based on the full life of the EPS members (properly discounted, the net present value of the gap would be more in the region of Rs 2,000 crore), the fact is the gap can only increase with each passing day as more members join in, and interest rates fail to touch the original levels prevalent at the time the generous scheme was first cleared by Dr Manmohan Singh when he was finance minister.

Indeed, while interest rates have fallen, salaries have not, and that has compounded the problem.

Since the government has already stopped such a “defined-benefit” scheme for its new employees, and replaced it with a “defined-contribution” scheme, a similar step is needed in the case of the EPS.

Reducing the concept of the “last salary” to perhaps the average of the last 5 years of service in place of just the last year, will lower pension costs by around 15 per cent. Increasing the retirement age to 60 will raise the period of contribution by two years and reduce the period of outflow by a similar amount, and this alone would go a long way in fixing the problem of the unfunded gap.

The existing provisions for paying pensions before superannuation are also unduly generous and have caused a huge erosion of the EPS corpus. Making such changes now are certain to raise a furore, but since the only other option is something that will make the UTI look like a picnic, the government has to act without delay.