Commuted Pension – A Money Minting Business of the Government

Commuted Pension – A Money Minting Business of the Government

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Startled? Bitter but true. It is a harsh reality that the Government has made a profitable business out of the apparently innocuous ‘welfare measure’ called “Commutation of Pension”. Calculations show that the Government recovers much more than the amount it extends ostensibly as a welfare measure to the retiring personnel. The main reason projected by the Government for excess recovery is the ‘mortality risk factor’ as the balance recovery is waived in case of death. The hard fact remains that commuted pension is like any other advance/ loan on which the Government charges interest (currently 8%) at market rate! The Government keeps on chewing on the pension for 15 years though it recovers the full amount with interest in 10 years and 10 months (in case of post-1.9.08 retirees). In the case of earlier retirees, it fully recovers in less than 13 years. 

As per extant rules [Central Civil Services (Commutation of Pension) Rules, 1981], commuted pension is restored 15 years after the date of drawal of the commuted amount. This period of 15 years is arbitrarily fixed, without any legal or mathematical basis. This amounts to an unjust and immoral enrichment of the Government at the cost of the pensioners/ senior citizens. This affects all the services, irrespective of the rank/ level of the pensioner. What right/ justification has the Government got to overcharge the pensioners and recover even a penny more than what it has paid? The Government is behaving like a typical rural money lender and is knowingly milking the pensioners.

In the succeeding paragraphs, I will mathematically and legally prove how the pensioners are being fleeced. The calculations, made on the basis of one particular pay, are only illustrative but the principle/ method applies equally to all the ranks, leading to exactly similar results.

Retirees between 1986 and 1995

The age of retirement during this period was 58 years. Such retirees have all completed the prescribed period of 15 years for restoration of pension. Since 1.3.1971 and until 1.9.2008, the Commutation Factor (CF) was 10.46 and the rate of interest was 4.75% p.a. Commutation allowed was 1/3rd of the basic pay. The basic pension of those who superannuated between 1.1.86 and 31.12.95 at the top of their pay scale (Rs.8,000), was fixed at Rs.4,000 and they got commuted pension of Rs.1,67,318 with a deduction of Rs.1,333 per month. The principal amount of Rs.1,67,318 was fully recovered in 10.46 years.

  • Considering the simple interest rate of 4.75% p.a., the total interest works out to Rs.36,250. This was fully recovered in 2.27 years [36250/1333 = 27.2 months or ~2.27 years]. Thus, total recovery period of the commuted amount works out to 10.46 + 2.27 = ~12.73 years. But the pensioner was made to pay for additional 15 – 12.73 = 2.27 years, amounting to Rs.36,250.

 

Retirees between 1996 and 2005

The age of retirement was raised to 60 years w.e.f. 1.5.98 after the 5th Central Pay Commission (CPC) report. Permissible commutation was also raised from one third to 40% of the basic pay w.e.f. 1.1.96. The Commutation Factor (CF) came down to 9.81 from 10.46. The rate of interest was 4.75% p.a. Those who superannuated between 1.1.96 and 30.4.98 at the age of 58 years at the top of their pay scale (Rs.26,000) got the commuted amount of Rs.6,52,704 with a deduction of Rs.5,200 p.m. Those who retired between 1.5.98 and 31.3.04 at the top of their pay scale (Rs.26,000) got the commuted amount of Rs.6,12,144 with a deduction of Rs.5,200 p.m. Those who retired on or after 1.4.04 after the merger of 50% DA with basic pay got Rs.9,18,216 with a deduction of Rs.7,800 per month.

  • Retirees between 1.1.96 and 30.4.98:- The principal amount of Rs.6,52,704 was fully recovered in 10.46 years. Considering the simple interest rate of 4.75% p.a., the total interest worked out to Rs.1,50,779. This was recovered in 2.42 years [150779/5200 = 29 months or 2.42 years]. Thus, total recovery period of the commuted amount works out to 10.46 + 2.42 = 12.88 years. But the pensioner kept on paying for further 15 – 12.88 = 2.12 years. Excess recovery was Rs.1,32,517.
  • Retirees between 1.5.98 and 31.3.04:- The principal amount of Rs.6,12,144 was fully recovered in 9.81 years. With interest rate of 4.75% p.a., the total interest works out to Rs.1,41,409. This is recoverable in 2.27 years [141409/5200 = 27.2 months or 2.27 years]. Thus, total recovery period of the commuted amount works out to 9.81 + 2.27 = ~12.08 years. But the pensioner kept/ keeps on paying for further 15 – 12.08 = ~2.92 years. Excess recovery = Rs.1,82,447.
  • Retirees between 1.4.04 and 31.12.05:- The principal amount of Rs.9,18,216 has already been fully recovered in 9.81 years. With the simple interest rate of 4.75% p.a., the total interest works out to Rs.2,12,114. This is recoverable in 2.27 years [212114/7800 = 27.2 months or 2.27 years]. Thus, total recovery period of the commuted amount works out to 9.81 + 2.27 = ~12.08 years. But the pensioner will keep on paying for further 15 – 12.08 = ~2.92 years. Excess recovery = Rs.2,73,670.

Retirees from 1.1.2006 to 1.9.2008

Since 1.3.1971 and until 1.9.2008, the Commutation Table remained unchanged. The Commutation Factor (CF) in 2006-2008 was 9.81 and the rate of interest was 4.75% p.a. The basic pension of those who superannuated between 1.1.06 and 1.9.08 at the top of their pay scale (Rs.80,000), was fixed at Rs.40,000. Their commuted pension amount was Rs.18,83,520 with a deduction of Rs.16,000 per month. The principal amount is fully recovered in 9.81 years.

  • Considering the simple interest rate of 4.75% p.a., the total interest works out to Rs.4,35,106. This is recoverable in 2.27 years [435106/16000 = 27.2 months or 2.27 years]. Thus, total recovery period of the commuted amount works out to 9.81 + 2.27 = 12.08 years. But the pensioner will keep on paying for further 15 – 12.08 = 2.92 years. Excess recovery = 2.92 x 12 x 16000 = Rs.5,60,640.

Retirees with effect from 2.9.2008

This category of pensioners is the worst affected. They suffered a triple jeopardy: (i) 16.5% lower commuted amount (ii) 68% higher interest and (iii) status quo in recovery tenure. The persecution is explained below.

A new Commutation Table was introduced from 2.9.08 which reduced the commuted amount drastically without reducing the recovery tenure. Despite a sharp rise in life expectancy, the Commutation Factor (CF) was downgraded from 9.81 to 8.194, thereby reducing the commuted amount by a whopping 16.5% !!! To add insult to injury, the rate of interest was enhanced from 4.75% to 8% p.a., an astronomical jump of 68% even in this low interest regime !!! This category of pensioners suffered the costliest advance/ loan called the ‘commuted pension’.

The basic pension of those who superannuated on or after 2.9.08 at the top of their pay scale (Rs.80,000) was fixed at Rs.40,000. Their commuted pension amount is Rs.15,73,248 with a deduction of Rs.16,000 per month. Had the Commutation Table not been revised, they would have got a higher commuted sum of Rs.18,83,520 as per the old CF of 9.81. Thus, they were/ are put to the first shock loss of Rs.3,10,272 (-16.5%) at the outset, even before the recovery started/ starts !!!

  • Coming to the recovery part, the principal amount of Rs.15,73,248 will be fully recovered in 8.194 years. With interest @8% p.a., the total interest works out to Rs.5,10,417. This is recoverable in 2.66 years [510417/16000 = 31.9 months or 2.66 years]. Thus, total recovery period of the commuted amount is = 8.194 + 2.66 = 10.85 years. But the pensioner will keep on paying for further 15 – 10.85 = 4.15 years. Excess recovery = 4.15 x 12 x 16000 = Rs.7,96,800.

The following tables summarise the comparative position:-

Sl.

Retirement Period & Age

Commutation Factor

Interest

(% p.a.)

Basic Pension

Commuted Amount

Monthly Recovery

1986 to1995;

58 years

10.46

4.75

4,000

1,67,318

1,333

1.1.96 to 30.4.98;

58 years

10.46

4.75

13,000

6,52,704

5,200

1.5.98 to 31.3.04;

60 years

9.81

4.75

13,000

6,12,144

5,200

1.4.04 to 31.12.05

60 years

9.81

4.75

13,000

9,18,216

7,800

1.1.06 to 1.9.08;

60 years

9.81

4.75

40,000

18,83,520

16,000

2.9.08 onwards;

60 years

8.194

8

40,000

15,73,248

16,000

Sl.

Retirement Period

Commuted Amount + Interest (Rs.)

Recoverable in

Actual Recovery in 15 years

Excess Recovery (Rs.)

1986 to1995

2,03,568

12.73 years

2,39,940

36,250

1.1.96 to 30.4.98

8,03,483

12.88 years

9,36,000

1,32,517

1.5.98 to 31.3.04

7,53,553

12.08 years

9,36,000

1,82,447

1.4.04 to 31.12.05

11,30,330

12.08 years

14,04,000

2,73,670

1.1.06 to 1.9.08

23,18,626

12.08 years

28,80,000

5,60,640

2.9.08 onwards

20,83,665

10.85 years

28,80,000

7,96,800

In a nutshell, the commuted pension is fully recovered with interest in:-

  • 12.73 years in case of those who retired between 1986 and 1995;
  • 12.88 years in case of those who retired between 1.1.96 and 30.4.98;
  • 12.08 years in case of those who retired between 1.5.98 and 1.9.08;
  • 10.85 years in case of those who retired on or after 2.9.08.

Supreme Court Order of 1986

All the time, the Government is harping upon the Supreme Court Judgement of 9.12.86 in Common Cause Vs. UOI in Writ Petitions No. 3958-61 of 1983 under Article 32 of the Constitution of India. The justification given by the Government for excess recovery is two fold: (i) convenience of lump sum payment to pensioners and (ii) mortality risk factor. It is almost 29 years since the SC judgement was delivered while much water has flown down the Ganges since then. Several factors and circumstances, which were relied upon by the Apex Court, have undergone a sea change as elaborated in the analysis below:-

1)    As per an official release, the life expectancy in India currently is 67.3 years for males and 69.6 years for females. The average comes to 68.5 years. In 1986, when the Supreme Court judgement was delivered, life expectancy in India was only 57 years while the retirement age was higher than this (58 years). In 29 years after the judgement, there is a sharp upsurge in life expectancy by 11.5 years while the retirement age (60 years) is 8.5 years lower than the life expectancy of 68.5 years! This has reduced the projected risk factor (of non-recovery and waiver due to premature mortality) to almost zero. This factor alone demolishes the Government’s constant bogey of mortality risk factor.

2)    Even if a pensioner dies at the average life expectancy age of 68.5 years and the unrecovered commuted amount stands waived off, the Government is not a loser at all. The reason is that the family pension, which remains 100% only up to 7 years after retirement, i.e. up to the deceased’s presumed age of 67 years, is reduced thereafter by 40% after the death of the pensioner. This drop is exactly the same as the current commuted portion which is 40% of the basic pension. Thus, in the changed scenario, virtually no risk factor exists.

3)    When the age of retirement was raised from 58 to 60 years after the 5th CPC in 1996, the Commutation Factor (CF) came down to 9.81 from 10.46, thus lowering the financial liability of the Govt by 6.2% (though this drop was almost offset by the increase in the commuted value from 33-1/3% to 40% effected after the 5th CPC).

4)    As mentioned earlier, with effect from 2.9.08, a new Commutation Table was introduced which drastically reduced the commuted amount by as much as 16.5% because of the reduction in the CF from 9.81 to 8.194. Though the Government’s financial liability towards the commuted amount came down by 16.5%, the period of recovery was not reduced though it should also have been brought down proportionately by 16.5%, i.e. by 2.5 years. Thus, logically, even if we ignore other factors, the recovery period should have been brought down to 15 – 2.5 = 12.5 years.

5)    Apart from revising the Commutation Table, the rate of interest was raised w.e.f. 2.9.08 from 4.75% to the market rate of 8% which is almost double the previous figure. Thus, calling the commuted pension a concessional dole and a welfare measure is no more valid. The Government is claiming its full pound of flesh even in this low interest regime. In such a situation, why should the Government recover more than what it has advanced?

6)    A relevant portion of the SC judgement of 1986 is cited below:-

“In dealing with a matter of this nature, it is not appropriate to be guided by the example of Life Insurance; equally unjust it would be to adopt the interest basis. On the other hand, the conclusion should be evolved by relating it to the ‘years of purchase’ basis. An addition of two years to the period necessary for the recovery on the basis of years of purchase justifies the adoption of the 15 years rule. That is more or less the basis which appears to be equitable”.

This has two inferences:-

a)    No link of the concept of commutation can be made to life insurance. This demolishes the official stand that an element of insurance/ risk is made into the concept of commutation.

b)    The period of recovery for interest cannot exceed 2 years after the recovery of the principal amounton the basis of years of purchase. This leads to the following recovery periods for different retirees:-

Sl.

Retirees Between

Principal Amount is Recovered in

(Years of Purchase)

Total Recovery Period after Adding 2 Years for Interest Recovery

1986 to1995 and up to 30.4.98

10.46 years

12.46 years

1.5.98 to 1.9.08

9.81 years

11.81 years

2.9.08 onwards

8.194 years

10.194 years

7)    The Government’s argument that the period of 15 years was “fixed” by the Supreme Court is fallacious and misleading. A plain perusal of the judgement shows that this period was proposed by the Government itself during the pendency of the Writ Petition (as an offer of compromise) and the figure was simply accepted by the Court. No calculation chart was ostensibly submitted either by the Government or by the Petitioner to justify the proposal of 15 years but it was welcomed by all because till then, the recovery period was life long.

8)    A perusal of the judgement shows that 15 years is the upper limit while there is no lower threshold fixed. No bar has been placed by the Court on its reduction which can always be done in view of the changed circumstances like higher life expectancy, lower risk factor, revised commutation table, reduced commutation factor, increased interest rate, higher age of retirement and the changed scenario after the 4th, 5th and 6th Central Pay Commissions.

5th CPC Recommendation Rejected by the Government

The 5th Central Pay Commission, in Chapter 136, had specifically recommended reduction of the period of recovery to 12 years. The Commission had observed that the commuted value of pension receivable currently by an employee retiring at the normal age of 58 years was equal to 10.46 years’ purchase. It was, however, separately recommended that the age of superannuation be raised from 58 years to 60 years. Consequently, the commutation value in respect of employees superannuating at the age of 60 years and commuting a portion of pension within a period of one year would be equal to 9.81 years’ purchase. After adding thereto a further period of 2 years for recovery of interest in terms of the observation of the Supreme court, it was felt reasonable to recommend restoration of the commuted pension after 12 years. The Government rejected this recommendation summarily, without citing any plausible reason despite the Commission having given sound reasons for the same. 

Summary

Keeping in view all the factors and mathematical calculations, the exact period of restoration of commuted pension works out as under:-

a)    1st category of retirees (who retired between 1986 and 1995): They repaid the entire amount with interest in 12.73 years. The Government should refund the excess recovery made for 2.27 years with interest.

b)    2nd category of retirees (who retired between 1.1.96 and 30.4.98): They repaid the entire amount with interest in 12.88 years. Excess amount recovered for 2.12 years should be refunded with interest.

c)    3rd category of retirees (who retired between 1.5.98 and 1.9.08): Their repayment completes in 12.08 years. Therefore, their full pension should be restored thereafter. Excess amount recovered should be refunded with interest.

d)    4th category of retirees who retired on or after 2.9.08: Their repayment completes in 10.85 years. Their full pension should be restored thereafter.

The Forum of Retired IPS Officers (FORIPSO) gave a Power Point Presentation before the 7th Central Pay Commission last year and was able to convince it. These facts were also brought to the attention of the Government but these fell on deaf ears, forcing FORIPSO to file a PIL in Delhi High Court where it is pending.

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  • Ashwani

    If retirees are paying interest @ 8% then it is required to be linked to IT deduction. This being a loan/ advance of special category needs to dealt with Spl consideration by Govt.

  • skdking

    A shallow analysis. Not expected of Mr Khanna. Anyone with even rudimentary knowledge of finance can find thousands of holes in this childish line of argument. Dear Mr Khanna, Have you heard of PV or FV of money? Educate yourself first, please.

  • Col Manoj Kumar Gupta

    Govt will recover @8% but if the amount properly invested give an annual return of 25% which will be tax free then recovery 8% is taken care of.. problem is with this money people buy house or marriage of their children which is not an investment but full filling a liability which they did not do during life time

  • kcSharma

    I agree with Mr SKdking and Col MK Gupta. Col Gupta may tell us some good and secured investment plans for investment please.