Loophole in pension law can make EPFO implode PDF Print E-mail
Saturday, 25 November 2017 00:00
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It was not set up to provide lavish pensions to the well-heeled, but this is happening, and it can be easily gamed


The Employees’ Pension Scheme (EPS) part of the Employees Provident Fund Organisation (EPFO comprises EPF and EPS) was badly conceived from the very start, in that it provided for a lifelong pension effectively equal to half the last salary drawn by a subscriber, subject to the salary being under Rs 5,000 per month—if the person has worked for less than 35 years, the amount gets reduced. Such a generous pension may have been fundable when the EPFO was earning returns in the 14-15% range, but at today’s 8-8.5%, it is not. Keep in mind, the government had a similarly generous pension for its employees, but the costs rose so fast, it scrapped this ‘defined benefit’ scheme in 2003 and, since then, all new bureaucrats are on the New Pension Scheme which is a ‘defined contribution’ scheme; the retirement corpus depends on how much is saved and how this is invested.

Even so, the pension scheme could be justified in that it catered to a not so well-off section—the initial Rs 5,000 was raised to Rs 6,500 and then to Rs 15,000. EPFO envisages both the employer and employee contributing 12% of the basic—Rs 780 each if the basic is Rs 6,500. Of the employer’s contribution, Rs 541.45 goes to EPS and a total of Rs 1,018.55 goes to the EPF. Had this cap not been there, if a person had a salary of Rs 65,000 per month, Rs 5,414.5 would go the EPS and Rs 10,185.5 would go to the EPF. With the cap, however, just Rs 541.45 will go to the EPS and Rs 15,058.55 to the EPF. In March 1996, for reasons that are not clear, the rules were modified to remove this cap and allow an EPS contribution for any level of salary.

Since this allows everyone to get a pension equal to around half the last salary, many subscribers wanted to opt for it. When the EPFO authorities realised the import of their decision, and tried to stop this, subscribers went to court and, last year, a two-judge bench of the Supreme Court decided against the EPS. Everyone, it ruled, was free to contribute 8.33% of their income to the EPS and get a pension equal to roughly half the last salary drawn by them. The scheme, always unviable, became even more unviable since it would now have to pay a huge pension to those with higher incomes. The system could also be gamed. A person earning Rs 6,500 could, towards the end of his career, ask his boss to, say, triple his salary and pay back the difference each month. The employer wouldn’t lose since the difference was being returned, but the person would get a much larger pension for the rest of his life. EPS lost the case because it didn’t have good lawyers or because it simply didn’t present a solid case to SC. Since EPFO will go bankrupt if large numbers of people in higher income brackets avail the uncapped pension, the government needs to ask for a larger SC bench to review it. Alternately, re-impose the Rs 15,000 cap so that only the less well-off can avail of it by, if need be, going to Parliament.


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