A CASE STUDY
DEFINED BENEFIT PENSION
SCHEME vs.
DEFINED CONTRIBUTION based
SUPERANNUATION
(By Ashit K. Sarkar Retired Senior Advisor & VP - HR, & Past
Trustee of Pension Funds, Britannia)
3E Palmtree Place, 23 Palmgrove Road, Victoria Layout,
Ph/Fax: +9180 or 080-2554
0393 & also 4112 8153 Cell: 099720 12382
E-mail: [email protected] Home Page: http://www.ashitsarkar.co.nr
PENSION SCHEMES:
o
Many
organizations offer a Pension scheme as a part of the employee's terms over and
above the statutory retirement benefits (Provident Fund, Family Pension &
Gratuity), and such Pension Funds are often non contributory by the member
employees, and are usually funded by the Company. Some schemes provide for benefits to continue
to the surviving spouse and/or to the children after the pensioner's death,
with the objective of "taking care" of even the family.
o
Pension
schemes are mostly either "Defined Benefit (DB)" type or "Defined Contribution
(DC)" type. In the former DB scheme, the
monthly Pension is computed as a proportion (by dividing the Years of Service
by a stated factor) of the Final Salary.
For DC, the annual contributions made (@15% of Annual Salary normally)
during the career of each member, along with the interest, or any special
contributions or unused surpluses applied from the Fund, are utilized for the
purchase of an Annuity offered by the Life Insurance Corporation (LIC) from
such total amount, on retirement.
o
It
will be seen that for DB the total contributions have to be sufficient to keep
the Fund solvent and viable, to meet the purchase price of the future Pension
liability for all the members entitled to pensions. For DC, only the accumulated contributions
made for each member is sufficient to keep the Fund viable.
o
As
such, for DB, the "Ordinary Contribution" requirement varies with estimated total
liability taking into account the projected Salary trends, inflation, current
fund situation, interest rates, annuity costs by LIC, resignations or early retirement etc. [Ordinary
Contribution @ 5% to 15% of Gross Annual Salary (for all members) is usually
required], which necessitates Actuarial evaluation periodically to determine if
any further "unfunded liability" exists for solvency (which has to be met through
Additional contributions), based on Accounting Standard 15 laid down by the
Institute of Chartered Accountants of India. These contributions may not be tax exempt.
There is no individual account for any member, and for purchasing
individual benefits due as per the rules, the Trustees have to draw from the
Fund's total reserves, unlike the DC pension individual accounts.
o
Pension
Funds are created by the Companies under the Indian Trusts Act 1882 to
facilitate the administration, manage the finances and to purchase the annuity
policy from LIC in accordance with the Fund's rules for the entitled pension,
under the control of unbiased, impartial & independent Trustees. Any "approved
Pension or Superannuation Fund" (& their Rules - and/or any proposed
changes) require prior ratification by the jurisdictional Commissioner of
Income Tax (CIT). The Income Tax Rules
1962 define & state conditions for granting such status to a Trust. Currently, in addition to the Initial
contributions for any past services, "Ordinary Contribution" is limited to 15%
of the Member's Salary, and is permitted from the employer as tax exempt.
RECENT SCENARIO:
o
Consequent
to the trend of exploding and sharply rising basic salaries of Management staff
in recent years (from late nineties), and the increased Annuity costs due to drop in interest rates (which has also has reduced the interest income to the Funds), additional contributions beyond the
Ordinary contributions have become essential from time to time to keep any DB
Pension Funds solvent to meet the increasing future liabilities. Tax benefits to the Company may not be available
for such additional or special contributions.
o
Some
organizations decided to continue with the DB scheme, as the attractive Pension
benefit was a good strategy for the retention of executives, and they accepted
that the added cost of contribution was a part of result generating
compensation cost in line with the objectives.
Some reduced the divisor for future members while continuing with the DB
scheme (ITC used this method).
o
Many
deliberately decided to change to DC type of schemes to reduce future pension
costs, and therefore, after getting necessary statutory approvals, and careful
planning and extensive communication with the affected members, introduced
changes to DC system after ensuring that either alternative benefits, or choice
and protection to accumulated DB pension benefits were available to the
existing employees (Smithkline Beecham, Philips,
Cadbury, BASF, Marico, Novartis,
Murugappa Group, Tata Tea
& VST Industries are a few examples).
This was usually done by taking the Actuarial valuation of the earlier
defined benefits on the "transition date", and making it as the individuals
opening balance for the DC superannuation scheme post transition.
o
The
2005 Budget proposal for taxability of all contributions to the Pension Funds,
as against earlier tax relief provisions will have further need to review the
Retiral benefit schemes.
CASE STUDY "BRITANNIA
INDUSTRIES LIMITED (Part of Groupe DANONE) - The
SITUATION:
o
Britannia
Officers & Managers (throughout India) have been covered by two generous DB
schemes as a part of their service conditions (including provision for surviving
spouse & children of deceased pensioners), for which no contributions are
required from them, and only the company makes the necessary contributions to
meet the liability as per Fund Rules and actuarial evaluation periodically. The
two funds (OPF and CSPF) have been operating for more than 21 and 35 years
respectively, and have met their due obligations till March 2003 without any
dispute. The Funds & the Rules have been approved by the Commissioner of
Income Tax (CIT) III at Kolkata, and any changes
require his prior approval.
o
The
Trustees of OPF & CSPF are appointed by the Company, and consist of
Directors and a few senior managers, who regrettably are not independent.
Lately, they have tended to toe the Company's instructions in recent years in
order to safeguard their jobs, despite having personal misgivings, or have not
been neutral. They are now advocating
opposite views to what they had themselves followed and stated earlier.
o
A
number of employees from the unionized Workmen or Clerical staff level were
promoted periodically to the Officers grade, who had on inducement to the offer
of participating in the attractive DB Pension Scheme, accepted a lower Salary
after promotion (from their earlier Basic + VDA), and had given up their
earlier rights to (a) consequential increased PF & Gratuity eligibility,
(b) Overtime, and (c) automatic increasing Variable Dearness Allowance amounts
with passage of time (as were applicable in the unionized category prior to
their promotion).
o
Some
of the important relevant rules of the current OPF and CSPF are as follows:
Rule 19A(b)
of both the Funds empowers the Trustees to increase
the Pension on a recommendation from the Company. Rule 28 of OPF and 27 of CSPF confirms the
same through a Supplemental Deed, but restricts such addition or amendment
with: provided
however that such alteration does not adversely affect the benefits to be paid
or currently being paid.....provided always that no alteration in the Rules,
constitution or conditions of the Fund shall be made without the prior approval of the Commissioner.
Monthly Pension is
payable in arrears and shall commence as from the date
immediately succeeding the date of retirement.. (Rule 20).
Rule 27 of OPF and Rule
28 CSPF clearly forbids that No money belonging to the Fund in the hand of the Trustees shall be
recoverable by the Company nor shall the Company have any lien or charge of any
description on the same (Similarly, IT Rule 91(2) also debars any
such withdrawal by the Company, further strengthened by "under any circumstances").
The Funds are required
to be audited annually (Rule 10), and the Actuary of the Fund is required to
carry out an actuarial valuation of the Funds from time to time to report on
the viability of the Funds-Rule 19A(b).
o
The
Trustees had made many improvements
in the Fund Rules from time to time in the past on Company's recommendations,
and these were given affect to till March 2003, without being considered to be
in conflict with the IT Act and Rules in any way till then. Significant changes were:
Britannia celebrated its
Platinum Jubilee year in 1992 and in
accordance with the Board of Directors resolution of
All Officers and
Managers Annual Revision of Terms Letter affective 1st April 1992
included the above Platinum Jubilee Scheme
providing for 15% pension increase every 3 years to the eligible Pensioners, as
a part of their future service conditions (given in writing by the Company),
and which was later confirmed by the Fund Trustees in their letters to the
Pensioners at the time of retirement.
Based on a Board of
Directors resolution in 1996, (under the present Chairman, and supported by Danone directors), the Trustees revised the divisor factors in Rule 11(a) of
both the Funds, and made other improvements, which resulted in very substantial
increases in the future pensions for all. This clearly establishes that both
the Board of Directors and the Trustees not only supported, but were fully
conversant with the DB pension scheme being in no way conflicting with the IT
Act and Rules, contrary to the reasons now stated in October 2004 and later,
and further claiming now that Pension increases are against the Fund rules and
the IT Act, and therefore, cannot be done!
Additional contributions
based on actuarial recommendations were made from time to time by the Company
to the Funds to ensure the viability of the funds as required, particularly to
meet the added liability resulting from the above mentioned Board resolutions.
The Accounting Principles stated in the Annual Reports of the Directors to the
Shareholders confirmed such policy, and both the internal and external auditors
found no flaw with these contributions in the annual accounts during the
audits.
o
During
the latter part of the nineties, Britannia's top team embarked on a massive
growth plan with substantial modernization of its plants and equipment post
liberalization, and new brand & product strategy. It established a very prominent reputation in
the Industry as the market leader during this period, which established
household high brand value in the pursuit of the vision. (Sales jumped from Rs
4428 million in 1993/94 to Rs 14705 million in 2003/4 " PBT from Rs. 240 to
Rs.1963 million in the same period - to more than eight fold, and Profit After
Tax at ten times " from Rs.119 to Rs.1188 million!)
o
This
was achieved amongst other strategy, with strengthening of the Human Resource
within the Company through building up professional competency, and creating a
very desirable work environment with openness and humanism as a central theme -
which were also the announced values of Groupe Danone, Britannia's international partner. Employee satisfaction was a key strategy
followed, along with Customer satisfaction as the primary focus.
o
Britannia
became an important part of Danone's South East Asia
Pacific business, and contributed significantly in the region's Human Resource
development activities and conferences during this period.
o
Britannia's
work philosophy, value system, compensation and reward systems were reviewed
constantly in order to attract the best talent, and retention levels were high,
and the Company results were consistently amongst the best in
HOW NOT TO MANAGE - Post 2003 PERIOD:
o
Instead
of a prospective change through an open & planned communication process, by
an underhand and a very ingenious strategy, Britannia is now covertly
attempting to change the current DB Pension Funds for their Officers and
Managers to a "Defined Contribution" type of Superannuation Scheme, and the
present Board of Directors (including Danone
directors) has allegedly approved a resolution in 2004 to replace the existing
DB Pension with DC type of Superannuation retrospectively (for the entire service period of Officers & Managers), and
also to withdraw the applicability of the Platinum Jubilee Scheme (of 15%
tri-annual increase) even though it had by that date already become overdue on
April 1st 2004 to all past pensioners. This was contrary to their advised Terms, and
also specifically against the implied promise made to those promoted to the
Officers grade, but now being ignored by the Company. This change could have been managed easily with openness,
after announcing a prospective transition date.
o
Even
though any proposed change requires the prior approval of the CIT (for which
the application was only made by the Trustees in November 2004, and such
approval has still not been granted, and was rejected in June 2008), the Company illegally & arbitrarily
refused to pay the due Pensions (as per the approved Fund rules) to the
retirees from
o
Whilst
the Company has every right to change the terms, changing earlier terms to the
disadvantage of the pensioners, & existing staff without consent,
retrospectively and arbitrarily is certainly unethical, if not illegal. The Company is banking on their huge
financial strength and the relative helplessness of the scattered and aged
retirees with limited means in the scenario of the inevitably prolonged delay
and vulnerability of the judicial system (e.g.:
o
Surprisingly,
the Company appears to have stopped considering their motivated managers as
human beings, and decided to rely on shady legal opinions instead of fair and
just attitude without any openness that had been the clear HR policy
earlier. All dissent was harshly dealt
with resulting in total loss of motivation amongst one and all, which had taken
years to build. Any queries were
referred to lawyers, and delay tactics became the rule. The reputation of the
market leader and "the cherished Company to work for" only a few years ago
because of the perceived highly respected BRITANNIA brand, has nose-dived into
a dejected and a demotivated organization now - more than 60 managers,
including all the functional heads at the Executive Office in Bangalore (every
single one!), have left or had to leave this Company in the last two years,
with many more just waiting to leave!
o
The
Company also illegally withdrew Rs.
121,199,000 from one of the Pension Funds in Jan/Feb 2004 which amounts to
serious criminal offence, and makes the Fund unviable to meet its future due
commitments. This deliberate action
was taken just before the purchase of LIC annuities was to be made for the
committed 15% increase affective
CONSEQUENCES:
o
An
association of the suffering pensioners scattered around
o
After
prolonged follow-up and correspondence by many pensioners and also the
Pensioners Welfare Association, a very weak and deliberately mischievous and
misleading response was received from the Trustees in November 2004, which has
been point by point refuted and replied to by the Association on
o
Some
of the aggrieved pensioners have filed court proceedings - but which may take
years before they are decided and any relief becomes available, despite full
justification. However, the High Court
of Madras has accepted the Writ Petitions on
o
As
can be very clearly seen, the actions taken by BIL & the Trustees go
specifically against the Rules or laws, and it is only a matter of time before
their decisions will have to be overturned - unfortunately, due to the
inevitable delay in such decisions, the Pensioners will have to suffer in the
meanwhile. Some of the actions will not
only attract financial penalties, but also legal retribution. However, the damage to the Company's
reputation and integrity will be even worse, but the Directors seem to be unmindful
of this loss of credibility, and the dishonour to the Company.
o
Britannia's
effort to distance itself from the Pension Funds (& through their lawyers)
does not in any way reduces the Company's liability in meeting the terms of
service. The Company employed the pensioners (and not the Funds), and their
Salaries & revisions (on which pensions are computed) are decided, advised
and controlled by the Company, as also the Pension Rules. Since Pensions are deemed to be "deferred
wages" for the services given, the primary liability to meet the Pension
commitments continue to remain with the Company even if the Fund is unable to
pay for any reason whatsoever. In such
an event, the Company must directly meet the pension provisions from their own
funds.
o
What
is surprising is that both Britannia & Danone
with such great reputation of earlier value systems and capable management, are
content to lose their reputation and create demotivated management staff with
their absolutely unethical and unfair actions, which are so obvious, but they
are instead relying on legal loopholes, and considering them to be somehow
legally tenable.
_____________________
POST SCRIPT (Jan 2009):
As mentioned above, despite The Commissioner of Income Tax, Kolkata having rejected the rule change proposals in June 2008, the Trustees continued to insist on computing pension amounts as per their proposed rules (that had been rejected), ignoring the past practice, and the earlier approved fund rules that remained valid.
The Pensioners Welfare Association thereafter approached the City Civil Court at Bangalore regarding the illegality of the Company and Trustees actions in 2008, including a plea to replace Trustees with court appointed neutral Trustees. After a number of Hearings, the Court gave interim orders, pending final decision:
(1) forbidding the defendants to alter any Fund Rules (in June 2008), and
(2) to immediately pay interim pensions from dates of retirement to the 70 PWA members whose pensions were withheld - from the accumulated contributions and interest admitted to be held by the Trustees to the Court, without diluting the pensioners right to the pension amounts claimed by them as per fund rules - pending the final decision on the pension computation method, and on all other issues raised by PWA by the court. (ordered on Jan 1st 2009).