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Saturday, July 16, 2016


Commuted Pension – A Money Minting Business of the Government
By J.K. Khanna -

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