You are here: Home » Finance » News » Others
Business Standard

Banks to start new pension plan

Shriya Bubna  |  Mumbai 

In their first step towards introducing a pension scheme based on defined contribution, have in-principle decided to introduce such a scheme for new recruits in the officer cadre.
The cost of servicing the present "defined benefit" pension scheme has been mounting, with banks having to make provisions to the extent of 32 per cent of the employee's annual salary.
Under the new defined contribution scheme, banks would have to contribute only 10 per cent of the employee's salary, including dearness allowance.
The ministry had asked the banks to take a call on introducing the defined contribution pension scheme for their new entrants so that the scheme could be uniformly introduced for all The government had already introduced such a scheme for its employees, including officers, except the armed forces, from January 1, 2004.
At present, the Bank Employees' Pension Regulations, 1995, provides that all those who join the service of the bank on or after September 29, 1995, are compulsorily governed by the regulations and consequently eligible for pension.
For changing the existing defined benefit pension scheme, bank boards can propose an amendment to the regulations which has to be notified by the government.
Banks, under the aegis of the Indian Banks' Association, have informed the government that they would introduce the new pension scheme for fresh officer recruits.
However, for employees belonging to the sub-staff and clerical cadre, who are covered by the bipartite settlement dated October, 29, 1993, banks would for the moment continue with the existing pension scheme.
"Strictly speaking, bank boards can amend the regulations even for non-officer cadre employees. However, the bipartite settlement with workmen's unions covering their service conditions, including pension option, is under the Industrial Disputes Act, which is a central statute and hence binding on the parties. For officers, this is not the case. Meanwhile, we are further legally examining whether we can introduce the defined contribution scheme even for non-officer cadre," said a senior banking official.
Under the government's defined contribution pension scheme, the employee has to compulsorily contribute 10 per cent of the basic pay and dearness allowance every month. This contribution has to be matched by the employer.
The income that the employee receives is not fixed and depends on the returns earned on the funds contributed towards pension. For higher returns employees, can increase their contribution, even as the employer's contribution remains fixed.
"The new employee would be given an appointment letter stating the conditions applicable. It is then upto the employee to accept or reject the terms of appointment," said the official.
The existing pension scheme for bank employees provides for fixed income to the employee based on the duration of service and earnings. employ a total of 2.55 lakh officers and 4.73 lakh clerks and sub-staff.
"Banks cannot gauge the liability as of today and it is based on assumptions. The exact liability for the bank is known only when the employee retires. This is, however, a bottomless pit and the liability is continuing as the bank would have to service the liability over the life period of the employee, and even after the employee's death. Under the defined contribution scheme, the bank's liability ends when the employee retires," said the official.
"There can be no apprehension in this matter as the scheme would extend to only those officers who join as officers at a future date and not employees already on the rolls of the bank. It is fair and transparent,' said MBN Rao, CMD, Canara Bank.
The banks are likely to transfer the pension funds to the newly appointed pension fund managers. The Pension Fund and Regulatory Development Authority of India (PFRDA) had recently appointed State Bank of India, UTI Mutual Fund and Life Insurance Corporation as PFMs.
Employees could choose to invest their funds in predominantly fixed income instruments and some investment in equity or a greater investment in equity and the maximum risk option of almost equal investment in fixed income and equity.

First Published: Fri, August 24 2007. 00:00 IST