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Editorial: EPFO versus NPS

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SummaryDigging a bigger pension hole isn’t going to help

If the average person draws a monthly pension of R500 from the Employees Provident Fund Organisation (EPFO), going by the government’s figures, then hiking it toR1,000 as the government has done, early enough to beat the Election Commission’s code of conduct, is going to cost a pretty packet. Which is why, for now, the higher outgo is to be financed by the central exchequer—at R1,217 crore for FY15, it is almost equal to the government’s current annual contribution to the

EPFO of R1,400 core or thereabouts. Apart from whether it is appropriate to fund this largesse from taxpayer’s money, the larger question is the long-term viability of this action. The EPFO’s board of trustees, for instance, have not taken too many of the decisions—like increasing the age at which the pension is applicable after—that need to be made for the EPFO to become viable. The finance ministry’s contribution will take care of FY15’s problem, but what happens if the trustees don’t agree to the changes, as they haven’t for a long time. Will the finance ministry continue to bankroll the extra pension or will it simply be rolled back? The government’s solution, to bring in another 50-60 lakh workers under the EPFO—while it was mandatory that anyone earning under R6,500 per month had to contribute to EPFO, this has been raised toR15,000—will help bridge the gap since there will be more inflows. But if the scheme is fundamentally unviable—and right now, it certainly appears to be—adding in more workers will just postpone the problem. How much it will get postponed is not clear since the EPFO’s accounts continue to remain a maze. While the EPFO’s unfunded liabilities on account of pensions were rising each year, to R50,000 crore on last count, a new study by EPFO—in which it says it has given data from a bigger sample of subscribers to the auditors—puts the gap at R10,000 crore.

At a more fundamental level, given the EPFO’s poor coverage, worse service-quality and unsustainable model, it is not clear why the government is trying to push it down the throats of subscribers. In the case of government employees who had an even more generous pension, the government realised this would bankrupt it and so moved to a defined-benefit New Pension Scheme. Later, this was opened up to the private sector and to encourage its prospects, the government even committed to contributing to NPS

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