Welfare Benefits Of Employees In Small Scale Enterprises In Sri Lanka

Negombo fish seller | Picture by Dr. Nirmal Ranjith Dewasiri

By D.N. Raththepitiya and K.T.T. Dasunpriya –MARCH 28, 2021

Analysis of the existing coverage for formal and informal workers indicate that whilst the mandatory pension schemes for workers in the formal sector has a coverage rate of approximately 75%, participation of workers in the informal sector in voluntary retirement schemes is poor i.e. 34% coverage.[1] Low coverage of workers in the informal sector of the country in retirement benefit schemes is a problem as it will result in these employees experiencing high levels of poverty in their retirement.[2] These high levels of poverty are likely to intensify with age.[3] High poverty amongst the older demographics is likely to place a significant economic burden on the country, as the state would have to step-in to meet the food, shelter, and other basic needs of individuals in this demography. This in turn will undermine socioeconomic development in the country, as vital financial and other resources would have to be deployed to support the basic needs of these individuals. Part of the reason for low coverage of workers in the informal sector in retirement benefit schemes can be attributed to the fact that the legal framework for retirement benefit schemes for workers in the informal sector is different to that of workers in the formal sector. For example, as stated previously employee contribution to retire schemes is mandatory in the formal sector, whilst it is not mandatory in the informal sector. This study has been undertaken to determine if the current legal framework in the retirement schemes for informal workers is the reason for this low coverage.

Retirement benefit schemes in Sri Lanka can be broadly segmented into mandatory and voluntary retirement benefit schemes. Out of these two schemes, retirement schemes are mandatory participatory schemes for workers in the formal sector and voluntary participatory schemes for workers in the informal sector. Mandatory retirement schemes for formal workers include Public Service Pension Scheme (PSPS), the Widows and Orphans (W&OP) scheme, the Public Service Provident Fund (PSPF), and the Employees Provident Fund (EPF). Voluntary contributory retirement benefit schemes include the Farmers’ Pension and Social Security Benefits Scheme (FPS), Fisherman’s Pension Scheme (FSPS), and the Social Security Board (SSB). In addition to these mandatory and voluntary retirement benefit schemes operated by state organizations, there are also a number of voluntary retirement benefit schemes operated by private firms in Sri Lanka. These schemes include medical insurance scheme, pension schemes, and annuity payments. Key private firms offering retirement benefit schemes include insurance companies and commercial banks in the country

Retirement benefit schemes are important for both workers and society for a number of reasons. Retirement benefit schemes are important for workers as it enables workers to retire at a certain age, protects their income and living standards, and enables them to live a healthy and active life post retirement.[4] This importance of retirement benefit schemes is evidenced by empirical research which shows a growing percentage of Sri Lanka’s elderly population sliding into poverty due to the lack of sufficient replacement of pre-retirement income. This lack of sufficient replacement of pre-retirement income can be attributed to the low percentage of the population covered by retirement benefit schemes and weaknesses in the existing retirement benefit schemes i.e. decline in purchasing power due to inflation. Retirement benefits schemes are also important for society, as it reduces its financial burden i.e. high financial independence of retirees reduces the need for society to allocate financial, health, and other resources to support this demographic. For example, low percentage of the population covered by retirement benefit schemes has forced the Sri Lankan Government to allocate significant resources in subsidizing housing and health needs of the elderly.

Snapshot of the main characteristics of primary retirement benefits schemes in Sri Lanka

Current coverage of formal and informal retirement benefit schemes[5]

 

Discussion

Discussion of the legal framework for FSP

Findings from the doctrinal research revealed that a number of statutes have been introduced relating to voluntary retirement benefit schemes for workers in small scale enterprises. ‘Farmers’ Pension and Social Security Benefit Scheme Act No.12 of 1987’ was introduced as legislation for the establishment of a pension scheme for individuals either directly or indirectly engaged in the agriculture sector of Sri Lanka. The primary objective of the state in introducing this legislation was to provide social security for workers in the agriculture industry during their retirement and reduce their dependence of state welfare and family support after retirement[6]. The individuals in Sri Lanka community eligible to enroll in this scheme is clearly stated in No.452/7, Gazette 7 Gazette of May 1987. As per this Gazette in order to qualify for the scheme, an individual has to be a cultivator, whether as an owner, lessee, or tenantcultivator and should be engaged in the cultivation of either paddy or other types of cereals, vegetables, subsidiary crop cultivations, cultivation of other field crops, cultivation of betel, fruits and sugar cane, and cultivation of tuber and roots crops. Further, this Gazette also provides provision for owners, lessees, and tenant-cultivators to join the scheme if they are certified as farmers by an authorized officer under the Agrarian Service Act, No.58 of 1979, the Land Development Ordinance (Chapter 464), or the Crown Land Ordinance (Chapter 464). Those in the agriculture sector eligible to join this scheme was further expanded under Gazette No.522/6 of 7 September 1988. Under this Gazette, individuals employed in livestock farming, those whose primary livelihood is animal husbandry, and laborers employed in livestock farming, animal husbandry and agriculture crop cultivation are also eligible to join the Farmers Pension and Social Benefit Scheme. Further, legislation limits eligibility to enter this scheme to owner cultivators where the total farm land extent does not exceed 10 acres. Note, the land extent not exceedin10 acres includes farm land holdings of both the owner and his or her spouse. Further, in order to be eligible, individuals should not be members of any other formal or informal retirement benefit scheme in the country, and should be not less than 18 years in age and not more than 59 years of age. The Farmers’ Pension and Social Security Benefit Scheme Act No.12 of 1987 states that the rate of contribution to the scheme and subsequent amendments to it be specified by government gazette. Further, under this scheme whilst the minimum contribution should be according to rate of contribution stipulated by the government, there is no upper ceiling on the contribution i.e. members can contribute more than the stipulated contribution if they so wish. Further, the amount and the number of contributions that have to make by each member is decided by the AAIB based on the age of the member at the time of enrolment in the scheme. Members of this scheme have the flexibility of either making regular period payments to the scheme until they reach the vesting age, or have the flexibility of making a one-off payment in the year on enrolment with no subsequent or additional payments. Member making one-off payments are eligible to a discount on the total amount payable. The discount rate in this regard can is decided annually by the AAIB. Regular payments to the scheme can be made by member either annually or bi-annually[7]49

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