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Funding higher pensions PDF Print E-mail
Monday, 30 January 2012 00:00
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Need to look at inflows before hiking annual payout

 

Though the government and the trustees of the Employees Provident Fund Organisation (EPFO) are keen to raise the minimum pension payout to R1,000 per month—right now, only a fifth of people get more than R1,000 while a third get less than R500 per month—it’s important to know where the money to fund this largesse is going to come from. Else, the funding gap in the EPFO’s Employees Pension Scheme (EPS), already at R50,000 crore in 2009-10, will increase at a speed that will ensure even the government will not be able to fund it for too long. Right now, employers contribute an amount equal to 8.33% of the employees’ salary towards EPS and the government chips in with another 1.16%, taking the total to 9.49%—the rest of the employers’ contribution and all of the employees’ contribution go towards the EPFO’s Employees Provident Fund (EPF) which gives you a lumpsum payment on retirement. If this is not enough to fully fund pension payments equal to half the average of the salary drawn over the last year of employment (that’s roughly what the current rule works out to), what makes it worse is the fact that roughly a third of those who have money invested in the EPS make premature withdrawals—this, and the low levels of contributions are what ensure a third of people get monthly pensions of under R500.

There are huge problems with the EPFO accounts—the R50,000 crore hole in EPS is based on a 5.5% sample which EPFO admits is not a representative one!—but let’s ignore that. Even if you take the EPFO actuaries at their word, their calculations show the R1,000 monthly pension will be fully funded only if the 9.49% contribution is hiked to 13.5% at least—this is to be got by raising the employers’ contribution from 8.33% to 11.5% and the government contribution from 1.16% to 2%. Assuming that employers agree to this, this means a higher pension payout will be responsible for a lower EPF payment on retirement, so that’s not quite a win-win. What’s also required, the EPFO’s actuaries point out, is that the age till which you contribute be raised from 58 to 60, no withdrawals be allowed, pensions be calculated on the basis of the average of the last three years instead of the last year and so on. So when the EPFO board meets to finalise the R1,000 pension next month, it needs to keep all of this in mind. Given how, when interest rates were high at its inception, the EPS was fully-funded in the early years, the only way to keep it this way in the long-run is to move from the defined benefit system of EPS to the defined contribution system of the New Pension Scheme.

 

 

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