Pensioning off EPFO PDF Print E-mail
Wednesday, 07 August 2013 00:00
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As the FM says, there is a case for moving to NPS

With the labour ministry along with officials of the Employees Provident Fund Organisation (EPFO) meeting finance ministry officials on the widening gap in the Employees Pension Scheme (EPS), the question is whether the EPFO will once again be allowed to get away. Briefly, with the EPS running a gap of over R50,000 crore since the benefits it promised were designed at a time when interest rates were much higher than they are today and longevity less, the unfunded gap is rising dramatically each year. While there is a proposal to guarantee a minimum R1,000 per month as a pension, this requires raising monthly contributions from 8.33% to 14.75%—the finance minister’s letter to the labour minister last year had said that it was not certain this would make the EPS any more self-sustaining.


In the event, the finance minister had suggested that, as in the case of government pension schemes, while existing subscribers could be grandfathered, it made more sense not to perpetuate the problem. And to move all new subscribers to the more robust New Pension Scheme where, as opposed to the EPS’s defined benefit scheme, a defined contribution scheme would be put in place—subscribers choose their pension fund managers and, based on how they perform, they get annual returns/pensions. At a time when subsidies are under attack, and the move to markets is being done elsewhere, the same needs to be done for pensions. The alternative, if the EPS is allowed to continue with defined benefits, is a repeat of US64 when people’s life savings were put in jeopardy when the extra-generous government-run scheme collapsed.


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