The Employees’ Provident Funds and Miscellaneous Provisions Act 1952 initially provided only for the institution of provident funds. That is why Employees Provident Fund Organisation is so named and does not include the words ‘pension’ or ‘insurance’. The Act was amended in 1976 to bring in two new schemes, namely Family Pension Scheme and Employees’ Deposit Linked Insurance Scheme. The Act of 1952 was again amended in 1996 to bring in Employees’ Pension Scheme (EPS)—valid retrospectively from November 16, 1995—in place of the Family Pension Scheme. EPS was implemented in a hurry. Per se, it is a very beneficial scheme for the employees. It is one of the few pension schemes that provide defined fixed benefits without any linkage to the returns at all. It is one of the main reasons that actuaries evaluated this scheme to be highly deficit, it being as high as Rs 70,000 crore at one point of time. It has survived only because more than 75% of the members did not know about the benefits the scheme provided and withdrew the funds at a discount.
There is inherent contradiction in the scheme. The scheme benefits have been made out on the basis of contribution by the employer to the extent of 8.33% of the pay of the employee and 1.16% contribution by the government of India. The contradiction is that the contribution of 1.16% is restricted to a sum of Rs 6,500, while the benefits do not take into consideration any such restriction. The ministry of finance is of the view that this contribution of 1.16% will come only in those cases where salary of the employee is less than Rs 15,000 (earlier Rs 6,500). This has not been factored in in the scheme at all. EPS is also based on the assumption that the raises in the pay scale of the employees will be gradual. In a way, EPS does not factor the increases given by the Pay Commissions, etc. Let us understand through an example. Let us take two employees, Ram Lal and Sham Lal. Ram Lal’s employer contributes @8.33% of Rs 6,500 for 35 years, while Sham Lal’s employer contributes @8.33% of Rs 2,000 for first 30 years and Rs 15,000 for the last five years. Overall contribution in case of Sham Lal is much less, but as per scheme provisions, Sham Lal will get a pension of Rs 7,500 per month while Ram Lal will get a pension of Rs 3,250 per month.
EPS provisions also allowed pension to be calculated at a higher salary if the 8.33% contribution was made at a higher salary. Using this provision, some of the employees, especially of public sector undertakings, took huge pensions, some even higher than Rs 50,000 per month. This, to some extent, had to be accepted as it happened because of the wrong provisions of EPS. It definitely, however, was enrichment of relatively well-paid employees at the cost of low-paid employees. The EPS fund was not getting the 1.16% in respect of the contributions towards the well-paid employees, but they were able to extract more benefits. As a result, the low-paid employees never got an increase in the pension rate which was envisaged in the beginning and was also given in the first few years. Indirectly, EPS provides subsidy to well-paid employees at the cost of low-paid employees.
It is because of this reason that the government was motivated to issue a few amendments in EPS provisions in the year 2015. Earlier, pension calculation was made on the basis of average of last 12 months’ salary. It was decided to increase it to the last 60 salaries. Through circulars, higher contributions were also stopped. However, as amendments could not be allowed from a retrospective date, the existing members could misuse the provisions. One of the major problems for EPS arose when trade unions of some of the PSUs were successful in getting orders from the Courts that PSU retirees can even opt for higher contributions to the EPS from a back-date. Here, they got benefited due to the justice system prevailing in the country as a whole.
The unions could put up better lawyers and could also motivate the EPFO staff to be helpful. In any case, most of the representatives on the Board of Trustees of the EPFO also come from public sector background. The members of these organisations were further helped as the EPFO staff calculated the required amounts from these employees on a much lower side, using some provisions of the Act which actually do not apply in such cases. The after-effect of all these is that EPS is definitely going to be bankrupt. It is also learnt that the government has put a new scheme, which was specially designed to tackle this problem, in the cold storage. It was thought that there should be two pension schemes, one for employees having salary upto the threshold limit prescribed (which is at present Rs 15,000) and another for a section of employees who are better paid. The two schemes would have allowed better returns to low-paid employees as they would have stopped subsidising well-paid employees.
In a way, this problem of cross-subsidising the rich also happens in the case of Employees Provident Fund. In the case of the Provident Fund too, the guidelines for investment for well-paid employees as well as low-paid employees are the same. The overall return for well-paid employees becomes much larger as this section also enjoys income tax benefit on these deposits, while a low-paid contract employee does not get any benefits. For the sake of equity, it will be proper if the EPF is divided into two parts, one belonging to the employees who are paid less than the threshold limit and the second belonging to the rest. It can be taken care of by the Board of Trustees if it can declare returns in a way that provides a fixed return and a variable return more favourable to the less-paid employees. For example, one can think of giving 7.7% return plus a bonus of a maximum of `10,000, but not more than the contribution made by the member in Provident Fund Account.
Writer is Former Central Provident Fund Commissioner, EPFO, and former secretary, MSME