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New pension plan: A big let down

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Cuepacs must take a firm stand and should not compromise the pension rights of public sector employees, says A J Patrick.

The government has proposed a new pension scheme which requires public sector employees to contribute 11 per cent of their salary to match the government’s 12 per cent contribution to the new retirement fund, which will replace the existing Pension Trust Fund. This scheme replicates the private sector Employees Provident Fund (EPF) arrangements. The government hopes to lighten its financial burden with the proposed shift to the contribution based scheme.

But unlike the EPF scheme, the public sector employees may not be able to withdraw from the proposed fund for exigency purposes such as when there is a need to make a down-payment for a house or to meet the educational expenses of their children.

On retirement, the public sector employees are entitled to receive between 25-30 per cent of their savings as one lump sum described as payment of gratuity with the remaining amount providing them a monthly pension.

New scheme less attractive

A close scrutiny will reveal that the new scheme is less attractive compared to the present pension scheme (despite its shortcomings).

Under the new pension plan, the payment of pension is calculated based on what is left-over in the ‘savings’ after the payment of gratuity. The quantum of ‘savings’ under the proposed scheme would depend on the accumulation of funds contributed to the replica of the EPF based on the salary earned and the number of years of service. What is over-looked is the fact that the value of the money with the EPF diminishes over the years, thus affecting the purchasing power of the ringgit.

Under the existing scheme, on the other hand, the pension and gratuity is based on the last drawn salary, which is related to the employee’s standard of living immediately before retirement. Pensioners are guaranteed a gratuity of 7.5 per cent of their last drawn salary multiplied by the number of years served. They are also entitled to a  fixed sum of 50 per cent of their last drawn salary as pension if they have served not less than 25 years. As an example, under the present scheme, a government employee who has put in 28 years of service and is earning a monthly salary of RM1,000  would receive a gratuity of RM34,200. Any change in the employee’s career by way of advancement or promotion – even in the last year of service – would enhance the last drawn salary, resulting in a higher gratuity and pension.

The Harun Salary Commission in 1973 had recommended that the existing pension be related to the current cost of living. This was in line with the general principles that the pension paid should enable the pensioners to maintain a reasonable standard of living. This principle was also accepted by the Cabinet Salary Committee in 1976. Thus, since 1980, each time there is a salary revision for public sector employees, the pensioner gets a corresponding adjustment in his last drawn salary and thus his pension is also adjusted accordingly. This benefit completely ceases under the new proposed pension scheme.

What about medical costs?

Before 1975 employees in statutory bodies and local authorities who were on the EPF scheme, enjoyed a salary scheme that was 10 per cent higher than that of their counterparts in the civil service on the pensionable scheme. The Harun Salary Committee, which was set up to recommend a new salary structure for statutory and local authorities, also perpetuated this principle by providing a salary structure which was 10 per cent higher than that of the Suffian Salary Commission for the Civil Service.

As for medical benefits, the employers of the statutory bodies and local authorities continued to meet the cost of medical treatment of their retired employees and their dependants. This government  continues to provide free medical treatment only for its pensionable civil servants who retired.  But it refused to meet the cost of medical treatment of any retired employee if they were non-pensionable.

It is only fair that at least now, under the new pension scheme, the government absorbs the cost of  medical treatment of retired employees of statutory bodies and local authorities and their dependants.

National contributions and annuity payments

Under the existing pension scheme, employers in statutory bodies and local authorities contribute 17.5 per cent of their employees’ basic salary to the Pension Trust Fund (KWAP), which goes towards their employees’ pension and gratuity.

In contrast, from 1991, the government only makes a notional contribution of 5 per cent of its employees’ payroll. The pensions, however, are paid from the Federal Consolidated Funds for Government Employees. Would the Government still make the notional contributions of 5 per cent as being practised now  instead of  the 12 per cent of its obligatory EPF contributions under the proposed scheme?

The Harun Salary Commission in its report in 1973 had recommended the annuity payment of EPF for temporary employees in the statutory bodies and local authorities.  The EPF Act was subsequently amended to facilitate the setting up of an annuity scheme, but the government never adopted the Harun Salary Commission’s recommendation on the annuity scheme. Therefore it is nothing new since the Harun Commission had earlier proposed an annuity scheme with interest be converted into an annuity for a guaranteed period of 12.5 years.

Since the new pension plan is a contributory scheme just like the present EPF scheme, the provision of maintaining benefits even after being dismissed from service is understandable. The benefit is that unlike pensions, which are denied when an employee is dismissed, the fund under the EPF scheme follows the employee as his right.

Carrot-and-stick enticement

An attempt is being made to entice the public servants using the ‘carrot and the stick’ approach. This style was adopted in April 1996, when Cuepacs was asked to choose between:

•    payment of pension based on full period of service [which had actually been agreed to as reflected in the letter reference JPA (R) 81/16/4 Klt 16/43 dated 30 January 1996 by the Director General PSD] and
•    an increase in gratuity from 5 per cent to 7.5 per cent, enhanced salaries and allowances such as housing subsidies as well as – for the top civil servants –  new entertainment, maid and household maintenance allowances.

Cuepacs then surrendered its demand for payment of pension based on full period of service.

The government had earlier allocated RM2 billion and later added RM96 million to meet the increased salary and pension calculated for every year of service for the retirees. But after Cuepacs gave up the offer of payment of pensions based on full period of service, the RM2.96 billion was fully used for public sector employees still in service at that time. Cuepacs had compromised at the expense of the pensioners.

A similar pattern is being envisaged by enticing public sector employees with a proposal for full pension payments to be paid to their surviving spouses. Under the current practice, the surviving spouse only receives full pension for 12.5 years from the date of the civil servants’ retirement in the event the pensioner dies after which he or she is only entitled to 70 per cent of the original pension. This new proposal has no meaning because the pensions are to be paid from the retired civil servant’s own “EPF” savings.

Demand pensions based on full service

Instead of devising a new pension plan, the government, which had cited economic reasons in 1996 for its inability to meet the Pension Bill, should honour its commitment made a decade ago by calculating pension payments based on the full service of its employees.

After all, according to the Harun Salary Commission the limitation of 25 years service for maximum pension was to accommodate the reasonable expectation of every officer who joins the service at the minimum age and remains in service until the age of 55 years.

Employees in the Managerial and Professional Group with tertiary education enter the service not earlier than 24 years of age and those with medical degrees join at the age of 27 years.

Although their length of service is shorter compared with employees in the Support Group, they are adequately compensated with higher salaries. The Support Group who enter the service between the ages of 16 and 18 would have completed between 38-40 years of service at the time of compulsory retirement. Their earnings are very much lower and they can only be compensated if the total length of service is considered for the calculation of pension.

The government should have also considered granting public sector employees in the EPF Scheme an option to opt for the pension scheme so that they can also enjoy subsidised medical benefits.

Instead of misleading would-be public sector employees and withholding information (as they have done before in the past regarding medical benefits to employees in the EPF Scheme after retirement), the government should state categorically the advantages and disadvantages between the new and the existing pension schemes.

Cuepacs, rightfully, has rejected the proposed new pension scheme as it is deemed inimical to its members’ interests.

The task of developing proposals as a substitute for the present pension scheme falls mainly on the government, which is trying to find alternative means to cut cost. The government has simply found an easy  way out by shifting the cost of payment of pensions and gratuities to its employees, which amounts to passing the buck rather than solving the problem.

The government is in the process of tabling the Retirement Fund Bill 2006, which will establish a new retirement fund to replace the existing Pension Trust Fund. In doing so, it is our earnest hope that it will be guided by the provisions of the Federal Constitution. As a law-abiding government, it is morally-bound to act within the perimeters of the Constitution.

Cuepacs must take a firm stand and should not compromise the pension rights of public sector employees. Pensions are synonymous with public sector employees and, if the need arises, Cuepacs should institute industrial action if the government is adamant in proceeding with its plan to introduce this new pension plan as proposed.  

Article 147(1)

It is pertinent to note that Article 147(1) of the Federal Constitution safeguards the right of serving employees.

Article 147 of the Federal Constitution states that:

“ (1) The law applicable to any pension, gratuity or other like allowance (in this Article referred to as an ‘award’) granted to a member of any of the public services, or to his widow, children, dependant or personal representatives, shall be that in force on the relevant day or any later law not less favourable to the person to whom the award is made”

“ (3) For the purpose of this Article where the law applicable to an award depends on the option of the person to whom it is made, the law for which he opts shall be taken to the more favourable to him than any other law for which he might have opted.”

 AJ Patrick is current Executive Secretary of the Malaysian Rubber Board Staff Union and a former Deputy President of the Malaysian Trades Union Congress.

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