This study analyses the pension liabilities of Tamil Nadu’s Water Supply and Drainage Board, using a financing model, as well as assesses the impact of funding provisions for pension expenditure on the state budget.
Background
Pension reform for government employees is a subject of active debate, both in India and countries abroad, mainly due to the growing size of public sector pension payments and the increasing pressure they place on government budgets. The broad trends in pension expenditure in India during the past few decades indicate an increasing pattern of expenditure not just in terms of percentage growth but also in comparison to GDP, revenue income and expenditure. In this context, the Tamil Nadu Water Supply and Drainage Board, Government of Tamil Nadu has commissioned the Institute of Financial Management and Research, Chennai, to undertake this study, to estimate the pension liabilities of the TWAD Board over a defined period of time.
The main objective of the study was to analyse the retirement benefits available to TWAD employees and to reasonably estimate pension outlays that will be incurred by the Board over a 20-year period. To this end, the study involved – 1) reviewing the overall finances of the Board over the past 5 years; 2) reviewing past trends on pension liability and its impact on the overall finances of the Board and 3) prepare a projected statement of pension liability ver a 20-year horizon, with assumed levels of mortality in different age groups
Approach
A financing model for the TWAD Board (a state government infrastructure development agency focused on water and sanitation) was developed to estimate their pension liabilities over a multi-year horizon and revenue projections from various sources. The study also assessed the impact on state budget of funding provisions for meeting pension expenditure.
The analytical framework towards forecasting the pension liability of the TWAD Board involved gathering data on the following variables:
- List of pensioners and their nominees, family pensioners as on agreed cut-off date, with details of Date of Birth and Pension/Family Pension currently drawn, details pertaining to Commutation
- List of employees and their nominees as on cut-off date, with details of Designation, Date of Birth, Basic Pay, Date of Retirement, Date of Joining
- Administrative scale of pay and salary (Basic/Grade pay) structure
- Details of various retirement benefits (Last Pay Drawn, Pension, Gratuity, Commutation) and formula to arrive at the benefits
Key Findings
Employees of the TWAD board enjoy similar benefits as Government of Tamil Nadu such as pay, allowance , leave salary, pension and other condition of services. Income sources for pension include – Centage charges levied on the works outlay and Pension and Gratuity contributions. The financial review of TWAD board suggested that the the total pension expenditure in term of absolute size almost tripled during the 6-years prior to the projection period, at a compounded annual growth rate of approximately 19.07%. The salaries consistently constituted 20-25% of total expenditure, the percentage of total pension liability (pension, gratuity, commutation) to total expenditure has almost doubled from a low of 12% to over 20% during this 6-year period. This growth rate shows an increasing pension expenditure as component of total expenditure but also highlights the pension outlays that are as high as the salary outlays. The ratio of the total pension benefits to total income suggested an increase from 13% of the total income to over 25% during this 6-year period.
Implications
The estimated future pension costs of the TWAD Board are expected to grow steadily, without any alarming spikes during the next two decades. However, the absolute pension costs in real terms place quite a heavy burden on the finances of the Board, particularly in view of its limited income sources as well as limited jurisdiction over its own revenue sources such as centage charges and water tariff. To this end, this study recommends the Board to seek budgetary support from the Government of Tamil Nadu to ease the pressure imposed by its establishment expenditure. This support could cover the total pension liability in full or partially.