Commutation-Restoration of commuted pension after 12 years- Supreme court committee decisions
The following article on Restoration of Commutation has been prepared by Sri PS Prasad, President He is a member of Bharat Pensioners Samaj. .
Summary:
Item | 1983 position | 2009 position | 2023 position |
Age of retirement | 58 years | 60 years | 60 years |
Life expectancy in India | 54 years | 65.98 years | 70.6 years |
Mortality rate in India | 12.673 | 7.3 | 7.416 |
Estimated risk factor | 3 years | 1.5 years | 1 year |
Commutation tables | Table -1 | Table -2 | Table -2 |
Interest rate charged | 4.75% | 8% | 8% |
Commutation amount received at Rs 40000 basic pension | Rs 20,00,832/ | Rs.15,73,248 | Rs.15,73,248 |
Commutation Factor (CF) | 10.46 | 8.194 | 8.194 |
Interest charged recoverable in years | 2.60 | 2.66 | 2.66 |
Restoration of commutation of Pension calculation | 10.46 +2.60+3= 16.60 years | 8.194 +2.66+1.5= 12.354 | 8.194 +2.66+1.0= 11.854 |
Justified Restoration of commutation of Pension | 15 years | 12 years | 12 years |
The Supreme court of India in the „Common Cause‟ case directed the Central Government to consider the possibility of restoring the original pension amount after 15 years of period from the date of commutation since it was convinced of the calculation that the commuted lump sum amount is recovered back by the Government within 12 to 13 years of time.
The Government of India also accepted the proposal and restored the pension as it is present today.
The Central Civil Services (Commutation of Pension), Rules, 1981 latest amendment on 2013 states that the following :
A Government servant shall be entitled to commute for a lump sum payment of an amount not exceeding forty percent of his pension.
“The commuted amount of pension shall be restored on completion of fifteen years from the date the reduction of pension on account of commutation becomes operative in accordance with rule 6: Provided that when the commutation amount was paid on more than one occasion on account of upward revision of pension, the respective commuted amount of pension shall be restored on completion of fifteen years from the respective date(s)”
Let us examine the supreme court directives of 1983 restoring the original pension amount after 15 years of period from the date of commutation .
Commutation tables one table -1 is effective from 1.3.1971, – till 1/9/2008 with an interest rate of 4.75 %.
The retirement age as on 1983 was 58 years the purchase value of Commutation Factor (CF) as per table 1 for next birth day 59 years was 10.46
The basic pension of a person who superannuated on or after 1.1.1983 at the whose basic pay was Rs.8,000/ his pension was fixed at Rs.4,000/-.
The principal amount sanctioned was Rs 2,00,832/- [4000 x 10.46 x 12 x 0.4) with a deduction of Rs.1,600/ per month.
The currently sanctioned principal amount of Rs 2,00,832/ is fully recovered in 10.46 years [10.46 x 12 x 1600 = Rs 2,00,832].
If we consider the prescribed reducing balance interest rate of 4.75 % p.a. as simple interest the total interest works out to Rs 45,783 /-
This is recoverable in 2.60 years [49,981/1600 = 31.18 months or 2.60 years]
Hence the total commutation is recoverable in 10.46 + 5.15 years =15.62 years, As per the supreme court directions the interest recoverable in two years hence 10.46 + 2 years + risk factor of 2 years = 15 years
Hence the Central Government in 1983 has fixed Restoration of commutation of Pension after 15 years as per the Writ Petition No. 3958-61 of 1983. (Under Article 32 of the Constitution of India) orders in the Supreme court.
Many things have changed 1983 to 2023 after 40 years, especially the second commutation table-2 which is effective from 2/9/2008 till now with an interest rate of 8 %. The Central Civil Services (Commutation of Pension), Rules, 1981 has to undergo changes in view of many factors in the last 40 years.
Let us examine our demand of restoring the original pension amount after a 12 years of period from the date of commutation .
Second commutation table-2 is effective from 2/9/2008 till now with an interest rate of 8 %.
This interest rate on commuted value of pension is recoverable in 2.66 years . Commuted Factor = Take Example, Age Next birthday is 61 years, then the commutation value is 8.194 . Thus, total recovery period of the commuted amount is = 8.194 + 2.66 = 10.85 years
The basic pension of a person who superannuated on or after 1.1.06 at the whose basic pay was Rs.80,000) his pension fixed at Rs.40,000. Their commuted pension amount is Rs.15,73,248 [40000 x 8.194 x 12 x 0.4) with a deduction of Rs.16,000 per month.
The currently sanctioned principal amount of Rs.15,73,248 is fully recovered in 8.194 years [8.194 x 12 x 16000 = 15,73,248]. If we consider the prescribed reducing balance interest rate of 8% p.a. as simple interest (reducing interest as principle is already recovered), 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. Even after full recovery, the pensioner keeps on paying for 15 - 10.85 = 4.15 years. Thus, excess recovery = 4.15 x 12 x 16000 = Rs.7,96,800.
Expectation of life at birth for India has been estimated at 70.3 years for the period 2017-21, exhibiting an increase of 0.3 years from 2014-20. The life expectancy in the year 2008 was only 65.3 years . Hence the life expectancy has increased in the last 15 years at 0.3 per year.
The government servants life expectancy as per WHO statistics is 77 years. Government servants have a much higher life expectancy than the national average due to better quality of food & healthy treatment . Hence restoration of the commuted value of pension should be done after 12 years instead of 15 years at present.
The death rate (Mortality rate) of India has witnessed a significant decline over the last five decades from 14.9 in 1971 to 6.0 in 2020. as per the census department data indicates that death rate at all India level has declined from 7.1 to 6.0 in the last ten years, witnessing about 15% decadal decline. The corresponding decline in rural areas is 7.6 to 6.4 (about 16% decline), and for urban areas it is from 5.7 to 5.1 (about 11% decline).
According to the Ministry of Statistics and Programme Implementation of India, across the different age groups from 60 to 85 years and above, the trend indicates a general fall in death rates in the country in the past ten years, Mortality rate 2008 is typically expressed in units of deaths per 1000 individuals per year. Mortality rate among the elderly in India as on 2018 and 2008 , by age group (per 1,000 people is as follows ).
India: mortality rate among elderly by age group | Statista
|
Age group | No of deaths per 1000 people as per 2018 | No of deaths per 1000 people as per 2008 |
60 -64 years | 19.5 | 22.5 |
65-69 | 31.3 | 33.5 |
70-74 | 47.5 | 54.3 |
75-79 | 66.0 | 79.4 |
80-84 | 106.5 | 116.9 |
85-89 | 174.7 | 197.4 |
As per SRS Report for the years 2008, 2013 and 2018, the Age Specific Death Rate of elderly people for the age group 60-64 years has decreased from 22.5 in 2008 to 19.5 in 2018. For age group 65-69 years, age specific death rate has also decreased from 33.5 in 2008 to 31.3 in 2018.Hence for pensioners in the age group of 60 to 70 years the deaths per 1000 is 60 persons that’s means about 6% mortality rate in 2018 compared to about 7% in 2008.
Hence it is very clear that about 6% of the Pensioners who are in the age group of 60 years to 70 years only have died. . The risk factor is very less for those adopted for Commutation of Pension .The death rate is only more in 75 plus years .
Since already the Employees / Pensioners are paid less amount as the interest for commutation amount is deducted already at the time of making commutation payment through a commuted factor, there is no point for restoration of the Commuted Portion of Pension after 15 years. Restoration of the Commuted Portion of Pension should ideally be done after 12 years for all pensioners taking into account risk factors of higher life expectancy of 70 years and also higher interest of 8% is deducted at the time of making payment of commutation instead of 6.5%.
Commutation Factor (CF)
The fixation of Commutation Factor (CF) is very important one let us study and analyze it effect on the pensioners who have opted for commutation of their pension & how this commutation tables one table is being worked out in detail, The Central Government has often being informing that IRDA and LIC are expert body responsible for preparing the commutation factor (CF) and commutation tables on these basis the central government notifies. But these agencies have erred in preparing the commutation factor (CF) and commutation tables in 2008 , which is the basis on which the study paper is prepared, let us examine how.
The basic pension of a person who superannuated on or after 1.1.06 at the whose basic pay was Rs.80,000) his pension fixed at Rs.40,000 with 40% commutation value as example and examine the let us examine two cases of pensioners :
1) Those who have retired on 1/7/2007 , Commutation tables one table -1 is effective from 1.3.1971, – till 1/9/2008 with an interest rate of 4.75 %.
2) Those who have retired on 1/1/2009 , second commutation table-2 which is effective from 2/9/2008 till now with an interest rate of 8 %.
In case of pensioners who have retired on 1/7/2007 age 60 years , next birthday falls on 61 years , Commutation Factor (CF) is 9.81
Their commuted pension amount is Rs.18,83,520 [40000 x 9.81 x 12 x 0.4) with a deduction of Rs.16,000 per month.
The currently sanctioned principal amount of Rs.1883520 is fully recovered in 9.81 years [9.81 x 12 x 16000 =18,83,520]. If we consider the prescribed reducing balance interest rate of 4.75 % p.a. As simple interest (reducing interest as principle is already recovered), the total interest works out to Rs 4,86,274/-This is recoverable in 2.66 years [4,86,274/16000 = 30.39 months or 2.53 years].
In case of pensioners those who have retired on 1/1/2009
In the case of pensioners who have retired on 1/7/2009 at 60 years , the next birthday falls on 61 years , Commutation Factor (CF) is 8.194.
Their commuted pension amount is Rs.15,73,248 [40000 x 8.194 x 12 x 0.4) with a deduction of Rs.16,000 per month.
The currently sanctioned principal amount of Rs.15,73,248 is fully recovered in 8.194 years [8.194 x 12 x 16000 = 15,73,248]. If we consider the prescribed reducing balance interest rate of 8% p.a. as simple interest (reducing interest as principle is already recovered), 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].
Comparison between two commutation table-1 and commutation table-2
We can see that for the basic pension amount of Rs 40000/- in case of commutation table-1 they get the commuted pension amount is Rs.18,83,520/- and in case of in case of commutation table-2 they get the commuted pension amount is Rs.15,73,248/- Hence in commutation table-2 the pensioners get less commuted pension amount and pay more interest due to higher interest rate charged .
Normally a person gets ten years commutation in that case 120 months pension basic amount into 40% maximum commutation amount is to be given in this case Rs 40000 x 12 x 0.4 = Rs 19.2000/- he gets it if not opted for commutation.
The commutation table is being prepared on the grounds of three parameters as per the commutation table prepared by the LIC of India It is a mystery. This age-old formula is LIC’s invention which is opaque and subjective and, unfortunately, the Govt relies solely on this.
LIC(1994-96) Ultimate Rates Table Is used for COMMUTATION FACTOR based upon an actuarial life table is a table that displays the probability that a person of specific age will die before their next birthday.
Interest rates
Life expectancy
Mortality rate
Let us examine all the three parameters ,
Interest rates
Commutation tables one table -1 is effective from 1.3.1971, – till 1/9/2008 with an interest rate of 4.75 % whereas in second commutation table-2 which is effective from 2/9/2008 till now with an interest rate of 8 %.
A study of the Reserve Bank of India (RBI) repo rate from the past fifteen years shows the repo rate (Interest rate) is lowest in 2020 and 2021 as compared to 2006-08:
The RBI repo rate was at 6.5% as of July 2008 and started declining from 2019 onwards to 4% and once again in 2023 it is 6.5 % .
The GPF interest rate in 1971 was 5.7% , in the year 2008 it was 8% , in the year 2023 it was 7.1% . In the commutation tables one table -1 is effective from 1.3.1971 with an interest rate of 4.75 % was calculated against the GPF rate of 5.7% , the same analogy should have been applied for commutation tables one table -2. The interest rates are to be calculated only on the basis of RBI repo rates only not any other factors. Hence more interest is being taken into account while preparing the In the commutation tables one table -2. That is instead of 6.5 % interest rates the LIC & Government has taken into account 8% .
The interest rates are used for both calculation of Commutation Factor (CF) and recovery of interest portion from the pensioner after the recovery of principle amount .
Life expectancy & Mortality rate
The life expectancy & mortality rate is another aspect in determining the Commutation Factor (CF) .
Compared to the year 1971 , the life expectancy is more in the years 2008 and 2023 and the mortality rate is half that of 1971 in the year 2008 . Even the LIC published mortality rate has been reducing over the years. As per the actuarial life table of LIC for 60 years age in 1970-73 the Mortality of Indian Assured Lives factor was 0.2014 and in 2008 it was 0.011534.
In spite of lower mortality rate and higher life expectancy than in 1971 the Commutation Factor (CF) in 2008 was lower than in 2008, this is quite strange and the net result is that pensioners are suffering a lot.
Conclusion : The commutation tables one table -2. Is a faulty table constructed in the year 2008 as per the above data.
Due to higher interest rates charged the Commutation Factor (CF) is lowered and also higher recovery period is there .
The proper life expectancy and mortality rate should be taken into the account while calculating the Commutation Factor (CF).
There is a need to reconstruct the commutation tables one table -3 and find out how this LIC of India is really constructing the commutation tables and Commutation Factor (CF).
Restoration of commuted pension after 12 years- Supreme court committee decisions
REPORT OF THE SECOND NATIONAL JUDICIAL PAY COMMISSION VIGYAN BHAWAN ANNEXE NEW DELHI MARCH - 2021 PART - III (SUPPLEMENTAL REPORT) Important decision on Commutation and Restoration of commuted pension after 12 years
Conclusion are as follows : i. Restoration period of 12 years suggested by V CPC appears to be more than adequate. Infact as per the workings given by the Commission supra, it is seen that the lump sum paid in lieu of commutation stands recovered with an interest rate of 8% p.a.within 11 years. Even after giving due allowance to unforeseen contingencies, prima facie, it is reasonable to conclude that the restoration ought to take place on the expiry of 12 years and not beyond that.
ii. Prima facie it appears that the judgment of Hon’ble Supreme Court rendered in the year 1986 [(1987) 1 SCC 142] has lost its relevance in the present day context and cannot be taken as a binding precedent for all time to come. There are certain general observations which were primarily meant to give a quietus to the issue of commutation at that point of time, keeping in view the offer made by the Central Government for the first time to confer the benefit of commutation and restoration of full pension after a certain period.
iii. The issue regarding the restoration period needs to be examined denovo after issue of notice to Government of India (Department of Pension and Pensioners’ Welfare) and on consideration of the material placed before the Hon’ble Court.
Hence our stand on restoration of commuted pension after 12 years is correct and Central Government should implement the recommendations of Supreme court Judges
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Please consider the commutation value of pension as one type of loan given by the employer at a certain rate of interest to an employee on the date of his retirement and which is being repaid by monthly equal amount,, equivalent to commutted value . When the pension will be disbursed on monthly basis , plesae include in pension sheet mentioning the the residual amount of pension. when the loan (it may be Pro-note Loan ) account be closed the restoration of commutation value of pension well automatically be effective . In the mean time if Ex-employee dies ,no need to pay the remaining amount by the family members while family pension will be started
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