1. Defence pensions: Question marks over sustainability of unfunded pension systems

Defence pensions: Question marks over sustainability of unfunded pension systems

Pakistan, France, China and Germany also have ‘pay-as-you-go’ model schemes —whereby state benefits to retirees are paid out of contributions from current workers for their defence personnel, like in India.

By: | New Delhi | Published: November 22, 2015 7:46 AM
pension index

Defence pensioners are treated at par with national government employees. (PTI)

Pakistan, France, China and Germany also have ‘pay-as-you-go’ model schemes —whereby state benefits to retirees are paid out of contributions from current workers for their defence personnel, like in India. In the UK, all public pension schemes, including the Armed Forces schemes, have been replaced by new schemes, the Pay Commission report has noted.

The new Armed Forces Pension Scheme (or AFPS 15) remains non-contributory and in the nature of a Defined Benefit scheme, which is based on career-average pensionable pay, meaning that it will guarantee a certain level of pension.

In the US, defence pension is a non-contributory and a ‘Defined Benefit’ scheme but it is being financed through an accrual system. Each year the individual services transfer from their budgets into the Retirement Fund the sum necessary to fund the eventual retirement benefits.

The important change it brings about is that if today a policy is changed that would affect future benefits for the current force, the policy maker would now see the immediate budgetary consequences of that decision in the increase in the sum to be transferred to the fund.

Japan does not have a separate pension scheme for military personnel. Defence pensioners are treated at par with national government employees. In South Korea defence pensions are financed by contributions from the military members and the government (8.5 per cent of basic salary, respectively).

The panel notes, that there has been increasing concern about the sustainability of unfunded pension systems. For Defence forces, the annual addition of retirees, the increase in longevity, proposed OROP , will lead to a huge increase in the government’s liability.

Considering this, the panel recommends the government should try to set up a Defined Contribution Scheme for Defence forces, where the employee makes a contribution and a suitable sum is contributed by the government so that a sizeable corpus is built up.

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