1. EPFO subscribers warning! Pension law loophole could make it implode

EPFO subscribers warning! Pension law loophole could make it implode

It was not set up to provide lavish pensions to the well-heeled, but this is happening, and it can be easily gamed

By: | Published: November 25, 2017 4:17 AM
EPFO subscribers, Supreme Court,  lifelong pension,  EPS, EPS contribution, defined benefit scheme, New Pension Scheme  EPFO envisages both the employer and employee contributing 12% of the basic—Rs 780 each if the basic is Rs 6,500. (PTI)

The Employees’ Pension Scheme (EPS) part of the Employees Provident Fund Organisation (EPFO comprises EPF and EPS) was badly conceived from the very start, in that it provided for a lifelong pension effectively equal to half the last salary drawn by a subscriber, subject to the salary being under Rs 5,000 per month—if the person has worked for less than 35 years, the amount gets reduced. Such a generous pension may have been fundable when the EPFO was earning returns in the 14-15% range, but at today’s 8-8.5%, it is not. Keep in mind, the government had a similarly generous pension for its employees, but the costs rose so fast, it scrapped this ‘defined benefit’ scheme in 2003 and, since then, all new bureaucrats are on the New Pension Scheme which is a ‘defined contribution’ scheme; the retirement corpus depends on how much is saved and how this is invested.

Even so, the pension scheme could be justified in that it catered to a not so well-off section—the initial Rs 5,000 was raised to Rs 6,500 and then to Rs 15,000. EPFO envisages both the employer and employee contributing 12% of the basic—Rs 780 each if the basic is Rs 6,500. Of the employer’s contribution, Rs 541.45 goes to EPS and a total of Rs 1,018.55 goes to the EPF. Had this cap not been there, if a person had a salary of Rs 65,000 per month, Rs 5,414.5 would go the EPS and Rs 10,185.5 would go to the EPF. With the cap, however, just Rs 541.45 will go to the EPS and Rs 15,058.55 to the EPF. In March 1996, for reasons that are not clear, the rules were modified to remove this cap and allow an EPS contribution for any level of salary.

Since this allows everyone to get a pension equal to around half the last salary, many subscribers wanted to opt for it. When the EPFO authorities realised the import of their decision, and tried to stop this, subscribers went to court and, last year, a two-judge bench of the Supreme Court decided against the EPS. Everyone, it ruled, was free to contribute 8.33% of their income to the EPS and get a pension equal to roughly half the last salary drawn by them. The scheme, always unviable, became even more unviable since it would now have to pay a huge pension to those with higher incomes. The system could also be gamed. A person earning Rs 6,500 could, towards the end of his career, ask his boss to, say, triple his salary and pay back the difference each month. The employer wouldn’t lose since the difference was being returned, but the person would get a much larger pension for the rest of his life. EPS lost the case because it didn’t have good lawyers or because it simply didn’t present a solid case to SC. Since EPFO will go bankrupt if large numbers of people in higher income brackets avail the uncapped pension, the government needs to ask for a larger SC bench to review it. Alternately, re-impose the Rs 15,000 cap so that only the less well-off can avail of it by, if need be, going to Parliament.

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  1. mdr astral
    Nov 25, 2017 at 11:15 pm
    The EPFO central committee on its 23.11.17 meet had in its agenda among other things, investment of some of its surplus funds in private company debt. The 40k crore fund available with EPFO will benefit companies like Kingfisher etc. May be the writer wants have his finger in this pie. Instead helping people who have contributed to this surplus fund vested interests are trying to deny them their legitimate rights in their twilight years.
    1. R
      Rameswar Pattanayak
      Nov 25, 2017 at 8:19 pm
      Industrial employees are being cheated. EPS95 is worse than Atal Pension Yojana if one compare the ratio of contribution and pension. EPFO has bloated it's employee strength and splurging at the cost of employees. It will be better to disband it and allow NPS to operate.
      1. S
        Nov 25, 2017 at 10:46 am
        why you write totally against the interest of pensioners? instead of concentrating your intelligence in writing against pensioners, you better suggest ways to the government to further improve the lot of the pensioners. with Rs 15000 income cap, most of the pensioners are getting around Rs 2500 as pension per month. how any one can sustain with this amount? suggest measures to enhance the pension amount in a meaningful way instead of crying wolf
        1. R
          Nov 25, 2017 at 10:35 am
          Whole cheating of working class by the India Inc / Stock Market friendly Government ! PF /Pension money should not be invested in stock market securities.
          1. E
            Eve Fernandez
            Nov 25, 2017 at 9:50 am
            One point needs mention. The EPS contribution by employees is not returned after death. It remains in the fund. As members die the corpus keeps on going up. After many many years, it may become viable. But The gaming mentioned in this article can be tackled by taking averahe of ry drawn last 5 years, rejecting abnormal rises in the ry. Another way is linking the pension amount to the corpus accumulated. This should be the correct method
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