An unplanned pay hike may bring the NPPF’s sustainability deadline of 2036 much nearer

Jan 04, 2009 - Thimphu: An unassuming actor watching and waiting for the next hullabaloo over the pay hike proposal is the National Pension and Provident Fund (NPPF).

The extent of the hike and how it will be implemented has a direct impact on the life span of NPPF, which is projected to be about 30 years since its establishment in 2002, said the Head of Pension and Provident Fund Department, Sonam Yeshey.

He said all pension and provident fund schemes around the world have not sustained and “Bhutan will not be any different.”

The NPPF has 1,752 pension beneficiaries and 38,210 members from the civil service, government-owned corporations and the armed forces. As of June 2008, there were 597 civil service retiree beneficiaries and 26,330 in the civil service as members.

But with the number of beneficiaries increasing at a rate outpacing the contributions, sustainability is a major concern. The NPPF estimates that troubling times will start from 2028 and by 2036 the fund will not be able to meet pension liabilities.

Following similar experience, other countries have also initiated reforms in the civil service pension scheme.

In light of the concern, the salary hike proposal of the Pay Commission has nine recommendations to keep the sustainability period of the NPPF at 30 years.

A major recommendation is to give the raise in phases and not at once. It says only 50% of the raise should be clubbed to the salary in the first year beginning July 2008 and the rest to be given as allowance.

Another 25% should be clubbed to the salary in July this year and the remaining 25% be clubbed into the salary only from July 2010.

By giving the raise in phases, the government will save Nu 363 million in provident fund contribution, leave encashment, leave travel concession, scarcity allowance, and house rent allowance.

A phase wise revision will also benefit the NPPF. A case study shows that dividing a 30% raise in three phases of 10% each will save Nu 2,978 million over a period of 30 years. 

The Pay Commission says: “Smooth and regular increase in the civil service pay is necessary to minimize the adverse impact of the civil service pay on the Fund.”

Another major suggestion from the NPPF, also endorsed by the Pay Commission, is to increase the contribution rate, said Sonam Yeshey.

Today, the members contribute 8% and employers contribute another 8% for every member to the Pension and Provident Fund. The NPPF wants the present contribution of 16% to be increased to 26% which means the members and the employers should contribute 13% each. From the 26%, 20% will go to the Pension Fund and 6% to the Provident Fund account.

To better the post retirement benefit, the Pay Commission wants it to increase from 30% to 40% of the career average salary to 50% of the final basic salary.

It means a civil servant drawing Nu 60,000 would get Nu 30,000 as monthly pension benefit after retirement.

 Another suggestion is to increase the vesting period from 10 to 20 years. The vesting period is the minimum number of years served to make a member eligible to avail pension benefits.

The Pay Commission says, “It may not be rational for a member who served for only 10 years to get pension benefit of 50% of salary at the same level as a member who served for 30 years.”

After 20 years, the beneficiaries are to be given the option to take lump sum benefits or wait till 51 years for early pension or 56 years for full pension.

Sonam Yeshey said an option for the NPPF to sustain was to invest in major ventures. But “the lack of investment avenues in the country is a major problem,” he said.

   The pension services began in the country in 1976 under a scheme called the Government Employees Provident Fund. After it was restructured as NPPF in 2002, it is today worth Nu 6.5 billion and has 70 employees.