EPFO's pension mirage

Dec 13 2013, 09:21 IST
Comments 0
SummaryEmployee Pension Scheme is slowly defaulting on its promises and should be scrapped.

benefits and contributions).

Over a 20-year career, the table shows that employees would be better off than contributing to EPS (option 1) if they had paid their contributions to LIC and bought a deferred annuity (option 2). But what is shameful is that they would even have been better off if they had paid their contributions to EPFO in the defined contribution account and used the lump-sum of PF at retirement to live off a fixed deposit in a bank (option 3). While acknowledging the interest rate risk in third option, it must be noted that in this case the principal amount is not lost and available to the pension to will to his or her successor. An expert committee appointed in 2010 to review EPS made a similar case that EPS should revert to the original defined contribution structure because it is unsustainable without impossible contribution increases. It also expressed horror that only 5% of the data used for valuation is accurate and complete, i.e. only 2.4 million of the 44.5 million members had complete date and everything else was assumption based. The committee also noted that is EPS increased wages applicable to contributions and benefits from R6,500 to R10,000 per month and promised a minimum pension of R1,000 per month sustainability will need an increase in EPS contributions from the current 9.49% (8.33 employer plus 1.16 government) to 14.75% and a number of benefit reductions (pensionable salary to be calculated on last three years wages, delete withdrawal and nominee pension option, disallow 2-year bonus option, raise early pension age from 50 to 55 and retirement age to 60).

EPS is on the wrong side of history; civil servants and most private sector employees have moved away from defined benefits pensions during the same period that the sustainable EPFO carved out an unsustainable defined benefit programme. The only reason the Supreme Court did not accept the employers’ plea that it was unsustainable because EPFO made the case that it was a fantastic solution. But now it is clear that the only sustainable and fair long-term solution to EPS is to end it.

From April 1, 2014, no new subscribers should be brought into the scheme. From that date all employees will indicate to their employer if they wish to pay their entire monthly provident fund contributions (24%) to EPFO or open individual accounts with NPS. EPS should purchase annuities from LIC for

Single Page Format
Ads by Google

More from Edit & Columns

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...