EPS withdrawals being tightened to reduce mounting deficit

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New Delhi, Oct 6: need to fix the shortfalls before implementing any changes.

So, even if the current deficit is Rs 40,000 crore, it could rise to Rs 80,000 crore as the change in coverage rules will bring in many more workers into the scheme’s fold. In 2001, when the Centre increased the salary ceiling for mandatory coverage under the EPF Act from Rs 5,000 to Rs 6,500, the scheme was hit by a Rs 10,000-crore deficit.

The proposed changes in the pension scheme rules will not impact workers’ post-retirement pension benefits but help the scheme’s viability, the labour ministry explains. “We are arresting the increase in the scheme’s deficit by doing away with the provisions for commutation of pension and ‘return of capital’. Commutation, which allows workers to convert a part of their monthly pension income into a cash lump sum to meet immediate big-ticket liabilities at the time of retirement, isn’t essential as Indian workers already get a lump sum benefit from their PF and gratuity funds,” a senior official pointed out.

Commutation of pension is a mechanism that helps workers meet some contingent lump sum obligations, such as for a child’s education or marriage or closing a mortgage, at the time of retirement. However, since Indian workers get a lump sum from their PF as well as gratuity funds, the commutation option in the pension scheme isn’t necessary. “The idea is to safeguard the pension income. The commutation reduces the actual monthly income for retirees dramatically,” a senior EPFO official explained.

“Commutation is relevant in European nations, where there are no PF or gratuity funds for workers,” an official explains.

Though the Employees’ Provident Fund is a colonial legacy, the British themselves and most advanced Commonwealth nations have abandoned the PF system decades ago.

The other change in the scheme is meant to not just fix its deficit but also curb immediate outflows. In 2006-07, of the Rs 3,532 crore claims settled by EPFO on the EPS account, over Rs 1208 crore was for claims other than monthly pension income.

“For those who want their pension payments to start before the retirement age of 58, we currently reduce their pension by 3% for each missing year of service. Though the actuaries have been recommending raising this to 5% to dissuade members from claiming early pension, we have raised it to 4%,” the official said.