EPS withdrawals being tightened to reduce mounting deficit

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New Delhi, Oct 6: Five months before the 1996 general elections, the Narasimha Rao government introduced a populist new pension scheme for workers that offered survivor benefits, allowed premature withdrawals and an option to pull out a chunk of their accumulated savings at the time of retirement–-without a penny going from employees’ share of provident fund contributions. Launched when the world was realising the dangers of lavish pension promises and mulling a switch over to defined contribution pension systems, the Employees’ Pension Scheme 1995 was the only scheme in the world where both benefits and contributions are fixed.

Nearly five months before the 2009 Lok Sabha elections, fearing that the ill-designed scheme’s deficit could shoot up dramatically if the recent decision to expand the coverage of the EPF Act to firms employing ten employees is implemented, the UPA government is doing away with the option to withdraw a lump sum amount from the scheme at retirement. It is also creating disincentives for workers who are considering premature withdrawals from the scheme.

The changes in the scheme’s rules, being notified by the labour ministry, will result in a saving of Rs 42,300 crore, which will be sufficient to wipe out the current deficit. The ministry had already reduced the rate of return given to workers withdrawing from the scheme before completing ten years of service, reducing the scheme’s liabilities by Rs 11,936 crore. Combined, these three measures will cut the scheme’s projected outgoes by Rs 54,236 crore.

Conservative departmental estimates put the scheme’s deficit at Rs 40,000 crore- Rs 45,000 crore by now, though officials admit it could be much higher. Though an annual actuarial valuation of the scheme (to examine assets vis-à-vis projected liabilities) is mandated in the rules, the scheme hasn’t been valued at all since the UPA came to power. The last valuation of the scheme—as on March 31, 2004—revealed an unfunded liability of Rs 22,021 crore.

“The valuations are being brought up-to-date. We have recently appointed an actuary and are providing the requisite data to furnish the valuation reports for 2005, 2006, 2007 and 2008,” a senior official told FE.