Meeting the pension obligation

The political risks of any attempted reform of the law and practice relating to government employment are many. But inaction is not an option.

MALAYSIA has about 958,700 pensioners and beneficiaries, and the annual payment to them in 2020 was RM26.38bil.

Our life expectancy is increasing from 74.3 years in 2011 to 75.6 in 2021. On the criteria set by the United Nations, Malaysia is now an “ageing nation”.

Our government’s pension liabilities are going to expand further. According to a parliamentary report on Sept 28, 2021, pension payments will reach a whopping RM46.6bil in 2030.

How to manage or meet future pension obligations is, therefore, a matter of urgent consideration.

The legal problem is that pensions, gratuities or other similar allowances are protected by Article 147 of the Federal Constitution. Additionally, there is the Pensions Act 1980, the Pensions Re– Computation Act 1980 and the Statutory and Local Authorities Pensions Act 1980.

The Constitution in Article 147(1) states: “The law applicable to any pension, gratuity or other like allowance (in this Article referred to as an “award”) granted to a member of any of the public services, or to his widow, children, dependent or personal representative, shall be that in force on the relevant day or any later law not less favourable to the person to whom the award is made.”

For the purpose of pension, there are three “relevant days” under Article 147(2).

For those retiring before Merdeka Day, the relevant day for the applicable law is the date of the award. For those retiring after Merdeka Day, the relevant day for the applicable law is Aug 30, 1957. And for those who became a member of the public services after Merdeka Day, the relevant day for the applicable law is the date on which the person became a member of the public services.

The drastic consequence of the above provisions is that the right to a pension is entrenched in the Constitution. It cannot be adversely affected by ordinary legislation. The benefits can be enhanced but not made less favourable than under the law applicable on the “relevant date”.

Any ordinary legislation to decrease the government’s liability cannot be backdated. Any legislative or administrative initiative that adversely affects a member’s benefits cannot apply to those retiring before Merdeka Day, after Merdeka Day or to those who have already become a member of the public services after Merdeka Day.

To the above conclusion that the law relating to pensions is entrenched, the following exceptions or escape routes may be noted. Some of these routes will have undoubted economic benefits but may cause a massive political backlash.

1. Constitutional amendment: If the government can manage the political risk of displeasing 1.6 million public servants and can muster a two-thirds majority in Parliament, Article 147 can be amended in any way the government finds it necessary to decrease its liability prospectively or retrospectively. If it is prospective, it will affect only new recruits. If it is retrospective, it will affect all retired or serving public servants.

2. Ordinary legislation: Short of a constitutional amendment, the suggestions below may succeed in lightening the government’s pension liability.

3. Creating options: The government can draw up an attractive, alternative pension scheme that offers a new, holistic package to public servants. It can then offer public servants, serving or retired, an option to choose the new scheme over the scheme in operation on the “relevant day”. For example, the EPF option can be given with full tax relief for EPF deductions in contrast with today’s low ceiling on tax-free EPF deductions.

Once an option is taken, it will be deemed to be more favourable. This is because Article 147(3) provides that “where the law applicable to an award depends on the option of the person to whom it is made, the law for which he opts shall be taken to be more favourable to him than any other law for which he might have opted.”

4. Disciplinary cases: A pension is not an absolute right. Under the Pensions Act 1980 (Act 227), the Yang di-Pertuan Agong can withhold or reduce a retiree’s pension if there are grounds for doing so.

A practice could be adopted that delinquent public servants who have been convicted of serious disciplinary offences could have their pension reduced. Reduction of pension after a disciplinary punishment will not amount to double jeopardy under Article 7(2).

5. New recruits: In relation to persons not yet recruited, the relevant laws can be re-drawn in any way the government in Parliament wishes. Pensions can be abolished or privatised. Consequently, any fresh recruits will enter the public service on new terms. The law will not be in violation of Article 147. It needs no constitutional amendment. It will not affect serving public servants who will continue to be governed by the earlier law on the “relevant day”.

6. Statutory bodies: Persons eligible for the protection of Article 147 are members of any of the public services. “Public services” are defined in Article 132 to mean the armed forces, judicial and legal service, the general public service of the Federation, the police force, joint public services mentioned in Article 133, the public service of each state within the Federation, and the education service.

Employees of statutory bodies and local authorities are not public servants and are not protected by Article 147 but by the Statutory & Local Authorities Pensions Act 1980 (Act 239).

This Act can be amended in any way and Article 147’s “not less favourable” rule will not apply.

7. Ministers and MPs: Public servants are not the only ones who receive pensions. Judges, MPs, assemblymen and members of the political executive also receive pensions – in some cases, multiple pensions and on terms far more favourable than what the law offers to public servants. The pensions of judges cannot be touched due to constitutional protection under Article 125(7). But MPs and ministers should provide leadership by example by reviewing the disproportionately favourable law on their pensions and benefits.

8. Nature of employment: In some countries, employment is moving from formal to informal employment, from permanent to contractual service. The digital age permits new possibilities.

All in all, the political risks are many in any attempted reform of the law and practice relating to government employment. At the same time, silence or inaction is not an option.

Prof Emeritus Datuk Dr Shad Saleem Faruqi is Holder of the Tunku Abdul Rahman Chair at Universiti Malaya. The views expressed here are the writer’s own.