Despite the government’s good intentions, the Social Security Fund faces a heap of challenges to overcome in order to become a meaningful social security programme.

 

--BY TEAM NEWBIZ

 

On November 27, 2018, Prime Minister KP Sharma Oli launched the ambitious, contribution-based Social Security Fund (SSF) claiming it as the ‘beginning of a new era’ amid lavish fanfare. “It is a historical achievement for us. The launch of the scheme will create a better work environment in the country,” said the Prime Minister unveiling the welfare scheme. As expected, the government’s move was met with a warm response from the general public as the level of social security is low for workers in Nepal. The establishment of the contribution-based Social Security Fund was provisioned in the Social Security Act, 2017, in a bid to provide a broad package of welfare, ranging from retirement pension and medical treatment to accident/disability, dependent family and maternity support, to over 3.5 million private sector workers in the first phase. The government has announced to include informal sector workers in the scheme in the second phase.

 

Clouds of Confusion

After the government’s announcement, private sector professionals have found themselves enveloped in clouds of confusion. The perplexity became even more obvious during a roundtable discussion organised by the HR Society Nepal (HRSN), an organisation of Nepali human resource professionals with over 200 members, at New Business Age on January 14. They expressed views on several issues concerning the SSF, Labour Act, proposed amendments in the Bonus Act, and discussed how the unclear rules and regulations and their incompatibility to the existing practices in people management in the organisations can affect the work environment in the country.

 

“There are several concerning issues for the private sector employees created by the inconsistent provisions in the Social Security Act, Labour Act and the under amendment Bonus Act. The problems will aggravate making the work conditions bad in the country if the issues are not sorted out and acted upon,” said Mohan Ojha, president of HRSN. 

 

The insurance coverage of employees, which remains unclear, is one example. It has been said that an employee under the SSF will immediately receive money for treatment in case of accident. However, the precondition that h/she is required to have worked for six months in the organization to get the insurance coverage is confusing. Similarly, the provisions related to pensions are also likely to be disheartening for highly skilled people to join companies/organisations operating in Nepal, say HR professionals. As per the current arrangement, job holders in the army, police and civil service start getting a pension right after their retirement. However, the SSF rules require private sector employees to reach 60 years of age and 15 years of contributions to the fund to be eligible for pension. Existing employment rules have set a 58-year age limit or 30 years of service, whichever is earlier, for government/public sector workers for mandatory retirement. It is also unclear if the private sector employees or their employers can choose not to join the SSF. “The pension system in SSF is discriminatory for private sector employees. The government has focused only on fulfilling the demands of labour unions. We will be implementing the model of social security fund which has failed in India,” opined Bhuban Raj Joshi, advisor of HRSN who is also the General Manager –HR at United Distributors Nepal, a Vishal Group company. 

 

The other confusing aspect is related to the gratuity fund. With the implementation of the Labour Rules, 2018, employers are required to deposit the gratuity amount of their employees at a flat rate of 8.33 percent of basic pay scale per month at the SSF. Earlier, the companies used to maintain a gratuity fund with them, setting aside amounts calculated on the basis of number of years of employees’ service, as per previous labour rules. With SSF system, a problem has emerged as to how transfer to SSF the amount of such gratuity fund will be done. There is lack of clarity in the new rules if a re-calculation is required for employees who have their gratuity allocated and deposited in separate accounts. Questions about what will happen to the existing gratuity fund and how the accumulated gratuity amount will be returned to the employees are yet to be answered. Many think this can be financially burdensome to the organisations. The outflow of cash will be huge in case the employers are to make gratuity payments to their employees at once from the amount accumulated till September 4 of last year.

 

 

Also, the tax on gratuity has become an issue for debate after the tax rate was raised to 15 percent last year which was earlier 5 percent. The changes occurred when the Inland Revenue Department in late 2017 issued an administrative order to clear the confusion related to gratuity tax being faced by officials at the Citizens’ Investment Trust (CIT). However, the tax rate hike led to a court case being filed against the government by a former official of the Agricultural Development Bank who retired from his job last year to receive a gratuity amount after being taxed Rs 1.2 million from the total amount, according to a source close to the matter. 

 

SSF will be one of the largest government-operated funds ever implemented in the country. Some people are concerned about the risk that the government may misuse or even nationalise it. The Social Security Act has a provision that the government may suspend the fund in a situation of a calamity and disaster. This means a disaster like the 2015 Gorkha Earthquake may be used as a pretext for suspension.

 

Already, there are some signs that confusions created by SSF are impacting the confidence of the corporate sector employees.  “Butwal Power Company (BPC) has operated different projects such as ‘Kabeli’, ‘Lower Manang’, and ‘Myadi Khola’. BPC staff are deputed on these projects on an ‘as required’ basis, but as these projects are separate companies, a need arouse for these companies to have their own staff. So, BPC decided to introduce a retirement package or a ‘golden handshake’ to manage the human resource so that those who were required in the project companies would go there. But surprisingly, a lot of top professionals submitted applications for the retirement package,” informed Pinakee Chalise, senior ERO at BPC.  According to him, it was found that the reason behind such professionals willing to leave the organisation was the social security scheme.  

 

“Our company is giving better facilities to the employees than the provision mentioned in the social security scheme. The employees feared that if they don’t leave now, their facilities will reduce from coming Shrawan 2076,” said Chalise, adding, “The employees are also worried their money deposited in the EPF will be transferred to the social security fund.”

 

Problems in Labour Act

The Labour Act, 2017 has created several difficulties to hire people for jobs, according to the stakeholders. While the provisions related to ‘hire and fire’ in the new Act are not much different from the previous law, there is a lack of clarity in terms of terminating the job contracts of employees based on performance evaluation. As per current arrangements, an employee can be removed from his/her post if their performance evaluation score is not satisfactory for three consecutive evaluations. Nevertheless, the Act does not mention the frequency of performance evaluation; whether it is to be done in a weekly, monthly, quarterly or annual basis. Joshi of United Distributor Nepal was of the view that the provisions in the Labour Act are ‘regressive’ in nature. “I don’t think the labour law will make things better for us in the present context,” he said. 

 

Regressive Provisions

Currently, some companies, particularly the banks, are providing more facilities to employees than envisioned in the Labour Act. “Now, the managements of such institutions are in a dilemma. Some companies have reduced their facilities to the employees just because of the Labor Act,” said Saroja Koirala, advisor of HRSN. 

 

In Nepal, BFIs are considered more generous than institutions of other sectors in terms of providing gratuity. They have been providing gratuity equaling 2-3 months to their staff. As per the Labour Act, 2017 and Social Security Act, 2018, employers are required to provide gratuity equaling only one month to the employees. HR experts and professionals fear that the reduction in incentives will impact the level of competitiveness among the staff. Generally, it has been seen that if institutions of a particular sector offer similar levels of facilities, people won’t be interested in competition and enhancing their skills. 

 

Furthermore, the Act has created difficulties for development sector (non-profit) institutions that have different sets of employment rules and regulations than public and profit-oriented organisations. “The Labour Act hasn’t considered peculiar situation of development sector institutions. As a result, it has become difficult for us to hire people and to provide facilities to them. People don’t work in the same INGO for an extended period. In this situation, it will be hard for us to get the required workforce in the future,” shared Euden Koirala, head of People and Organisational Development at WaterAid UK, Nepal Office, a London-based non-profit organisation working in the areas of safe drinking water and sanitation. 

 

Bonus Act Amendment Spells Trouble

Adding to the perplexity of the situation, the government tabled the amendments to the Bonus Act, 1974 in the House of Representatives, the lower house of the Federal Parliament on December 24, infuriating both employers and the employees. The stakeholders have strongly opposed the amendments stating that if the Act is amended, the work environment in the country will deteriorate causing friction in employee-employer relationships which has remained smooth to some extent for the last few years. The existing law requires companies operating in Nepal to allocate 10 percent of profit to distribute as bonuses to their staff on the basis of the pay scale of the employees who are eligible to receive such incentives. After the distribution of bonuses, the remaining amount is split into 70 percent and 30 percent, of which the 70 percent is managed by the firms at their own employee welfare fund and the latter is deposited in the National Welfare Fund which is said to be merging into the SSF. The 70 percent money collected in staff welfare fund of companies is distributed again to the staff as per various benefit schemes of respective firms. Thus some companies are distributing effective bonuses at much higher amount (equivalent amount of 10-12 months salary) than what Bonus Act’s words say. 

 

If the Act is amended, companies will have to transfer the entire amount of the money that remains after bonus distribution.

 

Many see the amendment of the Bonus Act as a government ploy to control the money which is being used for the welfare of employees. HRSN President Mohan Ojha predicts the start of a scarcity of skilled human resources for large national and multinational firms operating in Nepal if the Act is amended. “At present, many large firms have been distributing bonuses equaling 10 months of salary of the staff. If the amendments are endorsed by the parliament, the companies will not be able to distribute bonuses to their employees for more than three months. In such a situation, it is likely that high-level workers will go abroad to work,” he mentioned. Staff working at mid and lower tiers will also be disenchanted due to the reduction in facilities, which ultimately affects the labour productivity in the country.

 

Optimism in Manufacturing Sector 

Professionals from the manufacturing sector are expressing more optimistic views about the SSF and Labour Act than people from other business sectors. The Nepali manufacturing sector, where militant trade unionism remained strong for many years, seems to have warmly embraced the new labour law and SSF. “After the scheme was launched, it has been easy for companies to assign work to employees.

 

We are observing that productivity of our workers has increased with the launch of SSF,” expressed Gaurav Basnet, head of Human Resource, at Kiran Shoes Manufacturers, the makers of Goldstar footwear. “People working at our factory are showing enthusiasm in work more than ever,” he added. Some news reports have suggested that the morale of manufacturing sector workers across the country has gone up in recent days and industrialists are expecting lasting industrial peace following the launch of the fund.

 

 

Conclusion 

As SSF is a new scheme, it needs appropriate infrastructure, a trained workforce, and, above all, clarity in rules, regulations and plans. Also, addressing the issues in the Labour Act and Bonus Act can also solve various problems related to it.  HR professionals say that they were not consulted by the government while the social security and labour laws were being written. Despite the government’s good intentions, the SSF faces a heap of challenges to overcome in order to become a meaningful programme. Now the government needs to seriously consult with all stakeholders to remove the weaknesses of the ambitious scheme. 

 

As per the current arrangement, job holders in the army, police and civil service start getting a pension right after their retirement. However, the SSF rules require private sector employees to reach 60 years of age and 15 years of contributions to the fund to be eligible for pension.