EPS overhaul: Personal pension accounts on the cards

By: |
September 15, 2020 7:30 AM

The plan requires roughly a third of the total Employees’ Provident Fund (EPF) contribution on behalf of new employees with a monthly salary above Rs 15,000, to go to their personal pension accounts, rather than the EPF.

Currently, the government is believed to be sanctioning about Rs 6,000 crore annually to the EPS pool.Currently, the government is believed to be sanctioning about Rs 6,000 crore annually to the EPS pool.

The government has revived a proposal to amend the Employees’ Pension Scheme (EPS), 1995, to bring about a key change: all new entrants into the scheme will have individual, defined-contribution-based pension accounts, in lieu of claim to a common, grossly inadequate and rickety EPS pool as at present.

The plan requires roughly a third of the total Employees’ Provident Fund (EPF) contribution on behalf of new employees with a monthly salary above Rs 15,000, to go to their personal pension accounts, rather than the EPF.

The move is in sync with the government’s stated policy to create a ‘pensioned society’, with meaningful social security, even as it seeks to address the sticky issue of the indirect drain on the exchequer owing to the extant EPF scheme.

The government is acutely aware that the ‘administered’ EPF interest rate is in conflict with its policy intent to align all fixed-income instruments, including small savings schemes, with market dynamics; the smaller the EPF size, the lesser the distortion and attendant costs.

The EPFO, whose corpus still has less than 5% exposure to equity investments, is struggling to release interest amounts to its subscribers for FY20, after it approved a rate of 8.5%, one of the highest among all fixed income instruments.

According to the proposal, the individualised pension accounts will be created out of ‘defined contribution’, which will be 8.33% of the employer’s share of basic salary-plus-DA, for those with salary above the statutory limit of Rs 15,000 a month. For workers with salary up to the statutory ceiling of Rs 15,000 a month, the defined contribution will include the employer’s contribution of 8.33% (which by definition can’t exceed Rs 1,250 per month) plus the government’s contribution of 1.16% (which by definition can’t exceed Rs 174 per month).

The Centre will cease to contribute to pension of employees with salary above Rs 15,000 per month (currently, it contributes 1.16% subject to cap of Rs 174 per month to the EPS pool on behalf of all 4.5 crore EPF subscribers, irrespective of their income levels).

The proposal was scheduled to be discussed and decided upon at last week’s meeting of the board of trustees of the EPFO, but due to stiff opposition from representatives of trade unions, it had to be dropped. Sources said the matter will again be taken up at the board’s December meeting.

The government is keen to mitigate the apparent conflict between the sovereign’s interest to keep its borrowing cost low and the need to draw high returns on investments of EPF corpus on fixed income securities in order to raise resources for interest payout to its subscribers.

Also, the EPS is a ticking bomb, given that the Supreme Court is still hearing a special leave petition filed by the labour ministry and EPFO seeking annulment of a 2018 Kerala High Court order that entitled the petitioners concerned to pension under EPS-’95 in proportion of their actual salaries (rather than subject to the corpus accumulated on the basis of the capped contributions of the employers/government). As the court usually accords a lot of credence to the doctrine of non-discrimination, the fact that section of workers have already been paid higher pension based on actual salaries could go against the labour ministry-EPFO duo in the case, some analysts feel.

“For employees depositing provident fund contribution at pay above the statutory wage ceiling, monthly pension contribution at 8.33% of higher pay shall be deposited into their respective individual pension account,” according to the proposal. Individual pension accounts of the members shall earn interest as per the provident fund account.

Currently, the government is believed to be sanctioning about Rs 6,000 crore annually to the EPS pool. It sanctioned Rs 5,757 crore to the EPS in 2017-18 and Rs 4,285 crore in 2016-17, according to latest official data available.

According to the new EPS system being proposed, at the age of superannuation, the corpus accumulated in individual pension accounts shall be utilised to pay monthly pension in accordance with an actuarial-based option table to be notified by the government from time to time in consultation with the actuary.

Family pension shall be payable on member’s death to widow, orphan, dependent father or dependent mother, in that order. Family pension will be payable to only one family member at a time.

EPF is under the exempt-exempt-exempt system of taxation, meaning no tax payable at the three stages of contribution, accumulation and withdrawal. In line with its intent to rationalize the EPF and attune it to the market, the government in the Budget for FY17, proposed that withdrawal above 40% of the accumulated EPF corpus will be taxed. It, however, had to roll back the proposal due to a backlash from the salaried taxpayers.

But the effort to streamline the taxation system for pension and provident funds continued. Citing the absence of a combined upper limit for tax deduction on the contributions made by the employer to provident funds, superannuation funds and the national pension system (NPS), the government, in Budget FY20, made any such contributions by the employer above a combined upper limit of Rs 7.5 lakh per year taxable. The move was meant to deny undue benefit to employees earning high salary income.

The Employees’ Pension Scheme, 1995 came into effect on November 16, 1995 and with its introduction, the erstwhile Employees’ Family Pension Scheme, 1971 ceased to operate and all the assets and liabilities of the old scheme were transferred and merged with the EPS, 1995. With the current limits on contribution, it hardly provides a meaningful pension to subscribes, with monthly pension not exceeding Rs 2,500-3,000.

Under the EPS, the amount of pension one is eligible for is calculated by multiplying pensionable salary (average of last 60 months) with pensionable service and then dividing the figure by 70. The minimum pension is now fixed at Rs 1,000.

Of course, for levels above the Rs 15,000 monthly salary, the formula doesn’t matter much, as the higher salaries drawn doesn’t alter the “pensionable salary”.

Currently, the Central government contributes 1.16% of each EPF subscriber’s monthly salary to the consolidated EPS pool, but the salary base for computation is capped at Rs 15,000 per month, so that the monthly contribution doesn’t exceed Rs 174 a month. EPS is also funded by employer’s share of 8.33% of basic salary-plus-DA, again subject to a monthly cap of Rs 1,250; for employees with salary above the Rs 15,000 per month limit, the remaining part of the employe’s 8.33% share goes to EPF, along with the worker’s own contribution of 12%. EPS is compulsory to all members contributing to EPF.

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