While political parties have been pushing for a higher coverage as well as a higher pension—at least R1,000 per month—from the Employees’ Provident Fund Organisation (EPFO), the high and rising hole in the EPFO’s Employees’ Pension Scheme (EPS) has held them back. If, with a coverage of 4-5% of the working population, EPS has a R50,000 crore hole, what would happen if the coverage was to be increased or the pension payment to be hiked significantly? Indeed, earlier this year, EPFO actuaries pointed out the EPS could be fully funded with a R1,000 monthly pension only if the 9.49% contribution (8.33% from the employer and 1.16% from the government) is increased to 13.5% (11.5% from the employer and 2% from government); they also wanted the age of contributions to EPS to be raised from the current 58 to 60 (this is similar to what is happening in several European countries today), no premature withdrawals, etc.
While this is still being discussed, along comes a report from a firm of actuaries (they’ve done work for EPFO in the past) who received some training from the World Bank on its PROST model, which says the EPFO is fully-funded at current levels of pension! Have the EPFO’s actuaries been so completely wrong in the past? And if the new PROST model is so dramatically different, there needs to be a wider explanation and consultation—no one in the EPFO office seems to have much to offer by way of an explanation. The EPFO has never had the most transparent accounting systems (indeed, it does not know how many unique accounts it has and follows single-entry accounting that no one else in the world does) and has a record of trying to slip things by. Two years ago, R1,700 crore of ‘hidden’ reserves were discovered and the payout increased; a year later, we were told this was overstated and inflows for FY12 were dipped into to pay dividends.
The political class would like to use the PROST report to give out larger pensions and press for a larger role for the EPS, but we need to debate the report and the quality of data used—if EPS actuaries have been basing their numbers in the past on a 5.5% sample that is not representative of the EPFO universe, what data was PROST based on? Nor is it clear why India is going backwards on pension reform. It already has a New Pension Scheme which takes us away from the earlier Defined Benefit (DB) model to a Defined Contribution (DC) model. India is also moving towards bringing in private sector players, and Europe as we know is still struggling with fixing an over-generous DB scheme. The government not wanting to move forward on reforms is one thing but moving backwards to DB pension schemes is quite another.