While EPFO's corpus and subscriber base will rise significantly once the government raises the wage ceiling from R6,500 pm to R15,000 pm for mandatory coverage of provident fund, it will still come under pressure to pay a minimum pension of R1,000 per month from its Employee's Pension Scheme (EPS) that already runs a huge deficit.
To limit the losses, the rule change to guarantee a minimum pension will come with a host of riders.
In an internal circular, EPFO said: "The proposed amendments have a provision whereby only such new PF members shall become EPS (Employee's Pension Scheme) members whose pay at the time of joining will be less than or equal to R 15,000."
For those starting with a pay of more than R15,000 per month, the EPFO circular said "the entire employer and employee contribution shall remain in the provident fund (EPF) and no diversion to EPS shall be made". This means new employees getting more than R15,000 as basic salary will get back their accumulated PF amount after retirement but won't be entitled to any pension.
At present, PF contributions of both employees and employers are allocated to three funds -- EPF, EPS and Employees Deposit-linked Insurance scheme (EDLI). Employees contribute 12% of their basic salary towards EPF while employers contribute 3.67% towards EPF, 8.33% to EPS and 0.5% to EDLI. On its behalf, the government contributes at the rate of 1.16% towards EPS.
In case of employees already making PF contribution on a salary exceeding R6,500, the EPFO circular said the employees and
employer will have to "exercise a fresh option" to contribute on a salary exceeding R15,000. Here again, the employees will not get the benefit of government contribution of 1.16%.
Moreover, the the proposed amendment stipulates that pension amount will
be calculated on the basis
of average monthly salary for last five years of service instead of the earlier practice of one year.
Actuarial valuations show the deficit on EPS has snowballed to R61,608 crore in 2009 from just R43 crore in 2001. However, actuarial evaluation for 2011-12 indicates that the deficit may have come down to about R10,000 crore after factoring in data for 58% of members as against the earlier estimates based on just 5%.
The proposed minimum pension of R1,000 should not have posed too much difficulty as EPFO's average pension payment at present is about R900 per month. However, considering the fact that 83% of the pensioners get less than R1,000 per month, the EPS deficit is mainly due to the hefty pension payment to high-earners of yesteryear.
At present, a little over
44 lakh people draw pension, which is 10% of active
subscribers. EPFO's conservative estimate says the
percentage of people who may draw pension will rise
to 25% of the number of active subscribers in the coming decades.