Sri Lanka Central Bank VRS1 of 6

THE VRS EXPERIENCE OF CENTRAL BANK

The Context

In the context of the announcement of the Voluntary Retirement Scheme for central and provincial employees, it would be useful to study the features and experience of the VRS scheme of the Central Bank (CB), which is the oversight institution for monetary policy in Sri Lanka. This would enable the government to better appreciate the legal and implementation aspects of VRS and structure the final scheme. The scheme has been held out as a model for other countries. The employee strength has been brought down from 2,200 to 1,179 due to VRS and attrition..

The VRS was drafted by CB in the context of the exercises for functional reorganization of the Bank. The exercise involved the shedding of some traditional activities and the setting up of new departments handling payment systems, foreign exchange dealing and the like. Functional review drew attention to the implications of outsourcing various services like counting of money, transport, maintenance of buildings and part of security, as well as the introduction of information technology. The review also called for an assessment of the desired skill profile of personnel and the identification of the need for new persons with relevant qualifications and expertise. The Human Resources Division (HRD) initiated efforts for contracting services and computerization of database in tune with the functional review, well before the decision to offer VR.

The fact that the Bank could manage its operations efficiently with one-third the staff following the 1996 blast convinced the management that much downsizing was feasible. The extent of overstaffing was assessed by questionnaires filled by heads of departments and by independent consultant studies. The estimate was proved right after the VRS in that fewer people are to manage operations with the help of IT and improved processes.

While formulating the scheme in October 2001, the management kept in view the need to avoid the loss of highly skilled people in different areas like banking, law, economics and information technology. It was considered equally necessary to prevent the reentry of retired people and maintain the staff strength at the present or reduced rate. The effort was placed in the context of broader HRM reforms to modify the staffing pattern, reduce clerical cadres and improve professionalism. The HR staff visited Indian banking institutions to study their experience of voluntary retirement and learn from their mistakes.

Features of VRS

The scheme was first approved by public service commission and government and then the order was issued. Government arranged for loan from the World Bank to finance the operation and the Bank conducted an evaluation of the scheme. As against the estimated amount of Rs.1,500 million for the scheme, only Rs.1,200 million was spent.

The features of the VRS contained in the order dated October 1, 2001 are:

  1. The scheme was open to all eligible employees in the permanent service in the Staff class, Non-Staff class and Minor Employees with a minimum of ten years of service, and who are aged 40 years are more as on December 31, 2001. It was also open to permanent employees attached to the Sri Lanka Clearing House, vehicle repair garage, canteen and medical clinic irrespective of age, class and grade and service period.
  2. The scheme contained general and specific exclusions of employees. General exclusions covered security officers, employees on contract for a fixed period, employees against whom disciplinary action is pending or is being contemplated and employees who had executed a service bond in connection with studies abroad and where the obligatory period has not been completed.

Specific exclusions covered very senior management of the Bank including Deputy Governors, head of departments and Assistants to the Governor; other staff class officers whose acquisition of postgraduate qualification or Ph.D. has been funded or sponsored by the Bank, and; officers who have been recruited to the staff class with special qualifications like membership of the Institute of Chartered Accountants, Attorney-at-Law and graduate degree in computer science and IT.

  1. For the employees over 40 years of age and over 10 years of permanent service, the compensation was fixed at one month’s gross salary for each year of permanent service and two months gross salary for each year of remaining service up to 60 years of age. The compensation is subject to a maximum of current monthly gross salary multiplied by number of months of remaining service up to 60 years.
  2. For employees with a permanent service exceeding 25 years, the monthly pension was fixed at 90% of pensionable salary with a five years weight, besides commutation of pension under present rules There is a pro-rated reduction of pension for those with less than 25 years of service. Pension is payable from the date of retirement.
  3. The retiring persons could repay housing loan on current terms after retirement, enjoy medical benefits on par with other pensioners and secure refund of provident fund balance
  4. The employees with less than 10 years of service would get a higher compensation of 3 months gross salary for each year of past service and two months’ salary for each year of remaining service, subject to a maximum of current monthly salary multiplied by number of months of service remaining up to 60 years. They will also get statutory gratuity in lieu of pension and PF balance.
  5. All liabilities of employees would be deducted from the compensation payment and provident fund balance, while housing loan and interest would be deducted up to the age of 70 years for pensioners.
  6. Payment of compensation is exempted from income tax
  7. Just as employees are free to exercise the option for VR, the Bank retained the discretion to accept or reject the application for voluntary retirement under the scheme.
  8. Employees, who are permitted to retire under the scheme, shall not be eligible for reemployment in the Central Bank, or any institution in which the Bank has a majority holding, under any capacity or under any terms.

Analysis of Features

When considered against the proposed scheme of government, the following features of Central Bank scheme related to the adherence to the principles of adverse selection and reentry as well as concern for financial prudence are striking:

  1. The upfront specification of groups of staff officers whose applications will not be entertained, thus effectively ensuring the avoidance of adverse selection. The exclusion of persons with needed skills was cleverly achieved by relating it to the sponsorship for advanced studies and the possession of special qualifications.
  2. The general exclusion of employees on contract employment and those against whom disciplinary proceedings are contemplated or are in progress.
  3. The limit placed on the amount of compensation to the maximum of current monthly salary multiplied by number of months of service remaining up to 60 years.
  4. The distinction between the permanent employees eligible for pension and those not eligible for service, and rewarding the latter by higher compensation rather than by additional compensation over and above the ex gratia amount.
  5. The cash flow if further improved by the provision for recovery of all outstanding loans from the compensation instead of seeking to waive the outstanding loan in part and further seeking to award an equivalent amount to non-borrowers.
  6. Provision for ban on future employment of retiring persons in any capacity.

Implementation of the Scheme

The manner of marketing of the scheme, implementation and monitoring offer valuable lessons for the VRS in government:

  1. Checking the legal soundness of the scheme in advance, particularly ensuring the prevention of adverse selection and checking the transparency and objectivity of the procedures to prevent legal challenge on the ground of violation of fundamental rights.
  2. Invitation of applications within 45 days of the date of order through the head of department. The serially numbered application was a legally binding document and was legally irrevocable once made. Daily reports of applications were sent to the Governor, forestalling any pressure to withdraw the application, once made.
  3. The appointment of an executive board under the Deputy Governor , and consisting of Director (Legal), Director HRD and the HR assistant to the Governor and weekly meetings of the committee to oversee the process and decide on applications
  4. The setting up of a Help Desk to guide employees and clarify issues relating to the scheme including a computer software program to instantly provide information on the entitled compensation and other benefits for each employee. The Help Desk and senior managers counseled employees and convinced excluded groups not to press their protests in other fora.
  5. HR division organized several seminars to explain the best practices in VR in different countries and to remove misunderstanding HR focus groups discussed the issue in full. The unions were initially opposed to the scheme as it meant loss of membership but the groundswell of employee support diluted their opposition and ultimately many unions members applied for VR.
  6. Advance action was taken to calculate all outstanding payments and pension entitlement of eligible employees as soon as the deadline for applications was over, thus ensuring the prompt payment of compensation and commencement of pension. 75 percent of the compensation could be paid in three days after decision on application and the rest in a week.
  7. A transparent and consistent process was followed strictly according to the announced features of the scheme, while deciding on the applications. This helped to defuse legal challenges.
  8. The management stood consistently firm behind the decision to implement VRS and did not yield to political pressure to allow employees to withdraw applications or for employees to submit applications after the deadline.
  9. A Help Desk was set up to advise the employees on the prudent and profitable investment of compensation.
  10. The human resource data was updated and computerized, thus enabling the tracking of retired people and the support to HRM and training.
  11. The VR exercise was followed by restructuring of clerical and other cadres. The recruitment of peons and typists has been phased out. There is just one multi-skilled secretary to assist staff officers in each department.

Legal challenges

The Director Legal division had ensured that the procedures were proof against challenge on grounds of fundamental rights. The legal soundness of the scheme has been proved by the court judgments rejecting petitions moved by aggrieved applicants on various counts. One petition related to the demand for payment of pension by a person with less than ten years of service after undertaking to abide by the terms of compensation. The court held that the scheme was voluntary and that the applicants were bound by the terms of contract. Another case related to the demand for sanction of extra 5 years of benefit by rounding off 24.5 years to 25. The excluded categories did not choose to go to court. The unions relented in the end due to the popularity of the scheme. Yet another petition sought to question the Bank’s action on the ground of violation of its statutory duty but the court confirmed the contractual nature of VRS and dismissed the petition.

It is clear from the court rulings in the case of public undertakings that many challenges arise more from violation of due process and established procedures, thus inviting writs under fundamental rights.

Lessons of CB Experience

It is learnt that other public enterprises like the Port Authority have modeled their VRS on the model of CB. The Port Authority scheme provides a cap for compensation to the extent of Rs.750,000. There are valuable lessons from the experience of the Central Bank for other public enterprises and the government.

  1. Placing the VR exercise in the framework of a comprehensive exercise for functional review and human resource management, and continuing these exercises even after the termination of VRS.
  2. Structuring the compensation formula with due regard for attracting the surplus employees and for the finances of the Bank and avoiding the temptation to make the compensation too generous.
  3. Adherence to the principles of preventing the loss of skilled personnel and preventing reentry and reinforcing the reduction in staff by recruitment freeze, resort to contract employment and restructuring of cadres.
  4. Considerable advance preparation for the scheme such as a consultant study, survey of employees and HR focus groups and the effort to learn from the experience of countries like India.
  5. Marketing and communication strategy through seminars, training sessions and help desk with efforts to convince the non-believers.
  6. Consistent support of top management and refusal to yield to pressure.
  7. Oversight of the entire process and decision on applications by an executive board with high visibility and credibility,
  8. Building bridges with the employees continuously before, during and after VRS and assisting employees to invest the money.
  9. Importance of ensuring due process and transparent conformity to established procedures to avoid challenges before the court.

The Bank recognizes some of the failings of HR picture such as the absence of an effective performance appraisal system and the opportunities for further rationalization of staff. It also recognizes that a further VRS could be constrained by the fall in profitable outlets for investment of compensation and the changed political scenario.