There exists a fundamental and serious flaw in the formula adopted for fixation of the Commuted Value of Pension (CVP) for Government servants retiring on or after 2nd September 2008. This flaw appears to have escaped the attention of the authorities when the Commutation Table was revised on 2.9.2008.
The revised table is based on an expired Mortality Table of the Life Insurance Corporation of India (LIC), rendering the revised Commutation Table legally and actuarially unsustainable. The relevant facts establishing this error are set out below.
(A) Mortality Table and Commutation Factor – Explained
- The Commuted Value of Pension (CVP) is calculated by applying a Commutation Factor (CF) linked to the age at retirement. The CF is prescribed in the Commutation Table, which is actuarially derived from mortality data supplied by LIC. It is based upon LIC’s inputs called Mortality Table.
Mortality Tables are prepared under the supervision of the Insurance Regulatory and Development Authority of India (IRDAI) and are published by the Institute of Actuaries of India (IAI), which compiles and analyses demographic data to determine insurance risks and actuarial values. IRDA is tasked with regulating and licensing the insurance and re-insurance industries in India. Mortality Tables are published by the IAI which compiles and analyses statistics and uses them to calculate insurance risks and premiums.
2. Commutation Table–1 (ANNEXURE–1) was in force from 1.3.1971 to 1.9.2008. It was replaced by Commutation Table–2 (ANNEXURE–2), which has been applied to Government servants retiring on or after 2.9.2008.
3. The formula for CVP is:
CVP = P × 40% × CF × 12, where P is the full pension sanctioned.
Under Commutation Table–1, the CF for retirees at the age of 60 years was 9.81. Under Commutation Table–2, this CF was sharply reduced to 8.194 for post-1.9.08 retirees, representing a reduction of 16.5%:
(9.81–8.194) × 100/9.81 = 16.5%
This directly results in an equivalent/ proportionate reduction in the commuted amount payable to post-2.9.2008 retirees.
(B) Use of an Expired Mortality Table
4. The footnote to Commutation Table–2 (ANNEXURE–2) discloses that it is based on “LIC 1994–96 Ultimate Tables”. These tables (ANNEXURE–3), downloaded from the official IAI website https://actuariesindia.org/mortality-assured-lives-lic1994-96-ultimate-rates-applicable-31122004, are clearly marked on top as “applicable up to 31.12.2004”.
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Thus, the mortality table relied upon for revising the Commutation Table in September 2008 had already expired nearly four years earlier, conclusively establishing that Commutation Table–2 was ab initio defective.
5. Upon expiry of the LIC 1994–96 Ultimate Tables, the applicable mortality data w.e.f. 1.1.2005 was the “LIC (1996–98) Ultimate Mortality Table”, which alone should have been used while framing Commutation Table–2. This table is annexed as ANNEXURE–4, downloaded from the IAI website https://actuariesindia.org/mortality-annuitants-lic-1996-98-ultimate-rates.
6. A comparison of the two LIC Ultimate Tables shows that the mortality rate at age 60 declined from 0.013073 (ANNEXURE–3) to 0.010907 (ANNEXURE–4), reflecting a reduction of 16.6% in mortality risk:
(0.013073 – 0.010907) x 100 / 0.013073 = 16.6%
This reduction almost exactly mirrors the 16.5% reduction imposed on the Commutation Factor in Commutation Table–2.
7. Statistically and logically, a decline in mortality risk should have resulted in an increase, not a decrease, in the Commutation Factor. On this basis, the CF should have been enhanced from 9.81 to 11.44:
9.81 + (9.81 x 16.6%) = 11.44
Instead, it was arbitrarily reduced to 8.194, causing grave financial prejudice to retirees.
(C) Illustration of Financial Loss
8.The reduction of CF by 16.5% has resulted in substantial losses in CVP for post-2.9.2008 retirees. For Secretary-level officers retiring between 2.9.2008 and 31.12.2015, the loss is illustrated below:
(i) Pre-1.9.08 (post-1.1.06) retiree Secretaries: They retired in the Apex Scale of Rs.80,000. CVP = P x 40% x CF x 12 = 40000 x 40% x 9.81 x 12 = Rs.18,83,520.
(ii) Post-1.9.08 (pre-1.1.16) retiree Secretaries: Their CVP = 40000 x 40% x 8.194 x 12 = Rs.15,73,248.
(iii) Difference (Loss): Rs.18,83,520 – Rs.15,73,248 = Rs.3,10,272.
9. The loss suffered by post-1.1.2016 Secretary-level retirees is even more severe:
(i) Post-1.1.16 retiree Secretaries: They retired in the Apex Scale of Rs.2,25,000. Their CVP as per the new Commutation Table-2 = 112500 x 40% x 8.194 x 12 = Rs.44,24,760.
(ii) Their Entitled CVP as per the old Commutation Table-1 = 112500 x 40% x 9.81 x 12 = Rs.52,97,400.
(iii) Difference (Loss): Rs.52,97,400 – Rs.44,24,760 = Rs.8,72,640.
(D) Double Standards Adopted by LIC
10. While LIC recommended Commutation Table–2 for Government servants retiring after 2.9.2008, it continued to apply Commutation Table–1 to its own employees retiring after the same date.
Chapter VIII of the Life Insurance Corporation of India (Employees) Pension Rules, 1995 (ANNEXURE–5) clearly retains the old Commutation Table–1, exposing a clear and indefensible double standard.
(E) Case of Public Sector Bank Employees
11. Public Sector Banks have similarly retained Commutation Table–1 for their employees. Extracts from their Pension Rules are annexed below:
- State Bank of India – ANNEXURE–6
- Punjab National Bank – ANNEXURE–7
- Canara Bank – ANNEXURE–8
- Bank of India – ANNEXURE–9
This further confirms that the revised Commutation Table–2 was neither inevitable nor actuarially justified.
(F) Double Whammy: Arbitrary Rate of Interest
12. In addition to reducing the CF by 16.5%, the Government simultaneously increased the rate of interest on commuted pension recoveries from 4.75% to 8% for post-2.9.2008 retirees.
At the very least, this rate ought to have been linked to the RBI Repo Rate, which currently stands at 5.25% and was as low as 4% between 2020 and 2022.
(G) Triple Whammy: Recovery Period Not Reduced
13. The natural corollary of a reduced CVP was a proportionate reduction in the recovery period. However, the recovery period has been arbitrarily frozen at 15 years since 1986, despite a significant rise in life expectancy and a steep fall in mortality risk.
In line with the 16.5% reduction in CF, the recovery period should have been reduced to 12.5 years:
15 – 15 x 16.5% = 12.5
Retaining a 15-year recovery period amounts to unjust and immoral enrichment of the Government at the expense of senior citizens.
14. For Secretary-level retirees between 2.9.2008 and 31.12.2015, the CVP of ₹15,73,248 [8.194 x 12 x 16000 = 15,73,248] is fully recovered in 8.194 years. The interest component of ₹5,10,417 at 8% is recovered in 2.66 years [510417/16000 = 31.9 months or 2.66 years] (Rs.16,000 is the monthly recovery). Thus, the entire commuted amount along with interest is recovered in 8.194 + 2.66 = 10.85 years -a pattern that holds true across all ranks, including post-1.1.2016 retirees.
CONCLUSION
In light of the foregoing, the following corrective measures need to be undertaken by the Govt:
(a) Withdrawal of Commutation Table–2
As Commutation Table–2 is intrinsically flawed and based on an expired mortality table, it may be withdrawn and Commutation Table–1 be applied retrospectively w.e.f. 2.9.2008.
(b) Rationalisation of Interest Rate
The interest rate of 8% may either be restored to 4.75% or linked dynamically to the RBI Repo Rate.
(c) Reduction of Recovery Period
Given the sharply reduced mortality risk (0.010907 as on 2.9.2008, implying only 1.0907% retirees were prone to premature death), reduction of the recovery period to 10.85 years is fully justified actuarially and socially. Still, adding ~1.15 years for the nominal risk factor, the recovery period should not exceed 12 years.
