People switching to NPS have to still pay EPFO rent
Finance minister Arun Jaitley may have said, in his budget speech, that both EPF and ESI have hostages rather than clients—according to the labour minister’s statement, a whopping R27,000 crore of worker contributions remain unclaimed in dormant EPF accounts—but going by the latest amendments being proposed to the EPF Act, it doesn’t look as if too much is going to change on this front. Jaitley had proposed three major changes. First, employees should be free to move from the EPFO to the New Pension Scheme (NPS); two, employee contribution to the EPF would be optional below a certain threshold of income, in order to increase their meagre take-home pay; three, employees should be free to choose either ESI or some other approved health insurance product. Given the spirit of the budget, you would think moving to the NPS would be easy, but the amendment says employees will only get a one-time option to do so, which is a dampener since people moving out have no option to come back.
The amendments being considered state, in the spirit of the budget, that once an employee decides to opt for the NPS, his funds will be transferred to the fund manager of the NPS. The wording suggests all funds will have to continue to be paid to the EPFO and, within a month of this, the funds will be transferred to the NPS fund manager—presumably, that’s bad drafting since, if it is not, it just ensures the EPFO gets a free float for up to 30 days. What is odd, however, is that the draft amendments say that the EPFO will have to be paid the administration charge even for people moving to the NPS. Apart from the fact that this is grossly unfair, paying two charges—one to the NPS manager as well—alters the relative attractiveness of the NPS. Nor is it that the charges are minor. At 0.85% of the salary, the administrative charge works out to over 3.5% of monthly contributions. Technically, this charge is paid by the employer, not the employee, but since it gets added to the cost-to-company, it is being paid by the employee.
For some reason, the amendments proposed leave out the option of employee contributions being voluntary—below a certain level of income—though the central government is to be given the power to waive contributions for certain establishments or classes of establishment. Apart from the fact that this allows a new rent-seeking business to come up to get EPFO waivers, the idea is not to exempt all employees from making contributions, it is to exempt people earning below a certain amount. Nor have any changes been planned for EDLI, which is also quite expensive. If an individual is earning R10,000, his survivors will get R2 lakh under EDLI—but he has to pay R600 per year for this (0.5% of salary) as compared to the PM Jeevan Jyoti Bima Yojana which also promises R2 lakh on death but for an annual premium of R330. Given the manner in which the EPFO operates—imagine R27,000 crore of poor workers’ funds being blocked for decades—and its high charges for essentially running a government-securities mutual fund, it is not clear why its remit is to be extended to firms with even 10 employees from 20 at the moment. Apart from the fact that small units will now have to deal with more paperwork, it means poor employees will have to pay high charges and will not have the option to decide how much they want to contribute. All of which is quite the opposite of what the budget spoke of.