The pension fund under the Contributory Pension Scheme, CPS, has been growing since it became operational in 2004. Accordingly, there have been various efforts from many quarters to access the pension fund for developmental purposes.
Even state governments are not left out in the quest to access the pension fund for developmental programmes in their various states.
However, state governments’ involvement in the CPS elicits both positive and negative feedbacks.
The negative feedback is people being afraid of the pension fund being invested in wasteful ventures and the state not being able to pay at the end of the day.
Being aware of this fear and the possibility of it happening, the National Pension Commission, PenCom, came up with a guideline to check states involvement in pension fund.
PenCom has introduced more stringent requirement to ensure that you don’t just come in, access the funds of the PFAs and stop contributing. What PenCom tried to do is to equate pension payment with payment of salaries.
The mechanisms they want to use to do that are being fine-tuned PenCom’s guideline PenCom issued a guideline about state governments accessing pension assets by way of issuing bonds.
The initial position was that they will do Irrevocable Standing Payment Order, ISPO, for the repayment of the bond which is a normal thing. What was added was that the states will also require ISPOs for the pension payment.
Therefore, they are not only having standing payment order for funds to pay to the bonds but to ensure that pension deductions are also taken at source.
The whole idea is that they don’t have access to pension assets and while their bond is successful, remittance of pensions become at their own convenience.
In other words, if a state wants to raise money from the bond market and wants pension funds to be invested in the bond, the payment of pensions will no longer be at the instance of the state but will be deducted at source and remitted to the Pension Fund Administrators, PFAs.
It is believed that such move is a strong requirement and the push back initially could be wide but it requires financial discipline on the part of the states and such move is what we need as a country.
The guideline is important because state governments collectively are a huge employer of labour and they have a lot of employees that would ordinarily go for Retirement Savings Accounts, RSAs, but because they have to make their own laws first it is at their own convenience to do that.
So the idea is to get them on board, but make sure that they come on board safely and not just half way.
PenCom put in place the mechanism to ensure that at the end of every month it is no longer discretionary to remit money into contributors account just as salaries are not discretionary. The state government must pay contributors just as it is paying salaries at the end of the month.
Importance of the guideline The idea is to force the state governments to simultaneously put down money to make sure that the monies get into the pension RSAs of their employees as they are making accruals for paying the bonds.
This is to ensure that they don’t just abandon it midway by opening RSAs, take the monies to finance their bonds and then they don’t pay back.
So PenCom added an ISPO for pension deductions also. So if state governments want to access the monies in the pension fund, they must have both ISPOs. Ordinarily they must open RSAs, but now they have to have ISPO for pension payments.
It is just to ensure that the states do not renege on that particular issue. States usually give ISPOs to the Central Bank so that the money is deducted at source before it even gets to them to spend.