People's Democracy

 

Employees’ Pension Scheme 1995

 

Govt, Employers’ Contribution Must Increase

 

Dipankar Mukherjee

 

THE Provident Fund & Miscellaneous Provisions Act 1952 is specifically for the industrial workers both in the public and private sector. As per this act, deduction at  12 per cent (with effect from July  22, 1997, earlier it was 8.33 per cent) of the total wage of an employee is compulsorily made and an equivalent amount is required to be deposited by the employer in the fund managed by Employees’ Provident Fund Organisation. An optional Family Pension Scheme (FPS 1971) was started during 1971 to arrange payment of some amount of pension to the nominee wife/husband of any employee dying in harness. Here an amount equivalent to 1.67 per cent of wages of an employee and a matching grant out of the provident fund contributions got diverted to the pension fund with a government contribution of 1.16 per cent of the wage. This scheme was withdrawn with effect from November 15, 1995 with the introduction of Employees Pension Scheme 1995 (EPS 1995) which was made compulsory for the FPS 1971 members. In the new scheme, 8.33 per cent out of the employer’s contribution towards provident fund is required to be diverted to the pension fund with the remaining 3.67 per cent deposited in the PF account. The government’s contribution to the pension fund continued to remain static at 1.16 per cent of the wage. Thus PF benefit was reduced substantially and at the cost of PF benefits provision for superannuation or widow and children pension was made. There was widespread resentment amongst the workers against the scheme though the trade union movement in the country was not united to fight the case. It was CITU only and a few independent unions who organised movement through out the country, several court cases were filed by various unions in different parts of the country all of which were brought to the Supreme Court for hearing. Against all the Special Leave Petitions, the affidavit submitted by the solicitor general had asked for judicial approval on all the provisions of the scheme and the Bench having relied upon the perceived beneficial aspects of the scheme, had opined that it was a “good scheme”. The EPS 1995 thus got endorsement of the Apex Court and all the SLPs were dismissed.

It is therefore imperative to get clearance from the Supreme Court before withdrawal of any benefit from the scheme. However, the benefits of return of capital and commutation of pension by exercising option have been withdrawn with effect from  September 26, 2008. Similarly for the persons opting for early pension, the rate of reduction have been enhanced from the original 3 per cent per year to 4 per cent with effect from the same date. Withdrawal or reduction of any benefit of the original EPS 1995, which got due endorsement of the Apex Court, should not have been unilaterally withdrawn or modified without consent of Supreme Court or re-legislation.

 

Though as per the scheme 8.33 per cent of wage out of employers’ contribution towards provident fund is to be diverted to the pension fund but factually there is an upper cap of monthly wage which stands at Rs 6500 as of now. At this rate of contribution the maximum pension receivable by a superannuated person is Rs 3250, while the minimum pension is even below Rs 100 only. This is the real face of the much publicised social security for the industrial workers !

The plight of the pensioners has repeatedly been brought to surface by CITU’s representative in the central board of trustee (CBT) and on the floor of the parliament by the Left MPs quite a number of times.

In March 2008, the government of India constituted a committee for comprehensive review of EPS 1995, giving it the mandate to look into all possible ways and means to meet the demands of the beneficiaries while ensuring the long term viability of the scheme.

Subsequent to the recommendation of this committee, an expert committee on EPS 95 was constituted on June 12, 2009 under the chairmanship of the special secretary, ministry of labour and employment with one employer representative one employees representative (INTUC), the consultant actuary and the valuing actuary and representatives from the labour ministry and CPFC.

This committee has submitted its report to the government on August 05, 2010 with the following two recommendations:

Recommendation 1:

Introduction of provident fund-cum-pension annuity scheme – This is a defined contribution scheme with a mix of appropriate insurance. It has been suggested that two accounts shall be maintained in respect of each members: provident fund contribution account (PFCA) and annuity contribution account (ACA). The committee has suggested diversion of 11.5 per cent of the employer’s contribution to the pension fund and remaining 0.5 per cent to the employees deposit linked insurance fund. The government contribution in EPS has been suggested to be enhanced to 2 per cent in place of existing 1.16 per cent, thereby making the total contribution in the pension fund as 13.5 per cent. The establishments where the employer’s and employee’s contribution is restricted to 10 per cent, in their case 9.5 per cent of the employer’s contribution and 2 per cent of the employee’s contribution are to be diverted to EPS fund. They have also suggested that there shall be a statutory salary limit for coverage under the scheme upon which the contributions shall be calculated and to start with this salary limit is fixed at Rs 10,000 per month. The provident fund contribution account (PFCA) shall cater to the provident fund benefit for the members under the scheme. The old age regular benefit to the members shall be provided in the form of annuity purchased through the accumulation in annuity contribution account which will be allowed only at superannuation. In case of premature death, the spouse will be entitled to get accumulation in PFCA and purchase annuity from the accumulation in annuity contribution account. In addition, the spouse will also get a lump sum from EDLI for purchasing annuity. Pensioners existing as on cut-off date (say April 1, 2011) shall be compensated by providing a lump sum commensurate with the age and amount of pension of the pensioner.

 

Recommendation 2:

Modification in the existing employees’ pension scheme, 1995. – To ensure a package of benefits consisting of a minimum pension of Rs 1000/- to all category of pensioners and a provision of annual relief of 3 per cent, the following modifications in the existing scheme have been suggested;

a)                                         Increase in wage ceiling from Rs 6500 to Rs10,000 per month

b)                                        Diversion of the entire 12 per cent or 10 per cent, as the case may be, of the employer’s contribution to the pension fund. The government contribution in EPS has been suggested to be enhanced to 2.75 per cent in place of existing 1.16 per cent, thereby making the total contribution in the pension fund as 14.75 per cent. The establishments where the employer’s and employee’s contribution is restricted to 10 per cent, in their case 10 per cent of the employer’s contribution and 2 per cent of the employee’s contribution are to be diverted to EPS Fund.

c)                                         Pensionable salary to be calculated as an average of last three years service in place of the existing one year.

d)                                        Withdrawal option to be deleted

e)                                         Bonus of two years to be disallowed

f)                                          Nominee Pension to be disallowed

g)                                         The age of superannuation to be raised from 58 to 60 years and

h)                                         The age for early pension to be raised from 50 to 55 years

 

WHY WE RESENT

AND DISAGREE ?

The CITU has strongly resented and flayed these recommendations and sent a detailed note to the chairman, central board of trustees protesting against government’s intention to abrogate its responsibility in strengthening a social security scheme like pension. The CITU has demanded that the recommendation of the committee should be rejected and government and the employers have to contribute more to make the employees pension scheme 1995 viable. The following are the salient points of the note which has been sent to the labour minister who is also the chairman of CBT.

·                                            The study and recommendation of the expert committee is severely flawed and unreliable because the sample size is “small” and not representative. It is only 5.4 per cent of membership. Any recommendation for change of the scheme particularly when the change is of basic nature must be substantiated by actual figures and not notional one based on computed figures.

·                                            The expert committee has found that out of 4.45 crores of EPF members, information of about only 24.39 lakh, just 5.5 per cent of the total members, is consistent and complete.

The recommendation by the expert committee on such data and membership cannot be an authentic basis for assessing the deficiencies and / or sustainability of the EPS-95.

 

·                                            Comments on the recommendations for conversion to annuity scheme:

 

a)                                         The idea of annuity scheme makes EPFO/government free from the responsibility of providing pension to the employees or their families. EPFO will only be a caretaker of the contribution made under EPS-95.

b)                                        There is no guarantee that compliance will improve and/or the employers will be too enthused to get their employees registered under any annuity scheme.

c)                                         Annuity scheme does not serve any purpose in case of early death of an employee.

d)                                        There will be rampant misuse of fund by the annuitant fund manager because of lack of checks and balances and a question will be always coming up – if EPFO decides to opt for a diminishing role, why should employees opt to go for annuity scheme through EPFO? In this system the liability will rest on EPFO but the administration of fund, with all the associated dangers of fund management will be entrusted to others with little control over them.

 

The employees pension scheme 1995 has been conceived as a defined benefit social security scheme. Any departure from this criterion and to put it into a market driven annuity scheme is not acceptable.

 

·                                            Comments on the recommendation for modification in the existing EPS-95

 

a)  Raising the wage ceiling to Rs 10,000/- or to Rs 15,000/- means transfer of money from a member’s personal PF to EPS-95.

This will only lead to diversion of workers PF money to pension fund. As a consequence, the benefit of the worker towards PF is going to be reduced and pension will not also be substantially increased. 

b)                                  Moreover, the number of high paid workers is continuously decreasing, substituted by lower paid contractors’ workers and out-sourced workers. So, this ‘subsidy’ by high paid workers will get reduced progressively with time. Hence periodical revision of wage ceiling will have little effect on the finances of EPS-95 but it may have a disastrous effect on the whole EPF system as there may be large scale exit from EPF by the higher salaried employees. The entire process will be counter productive.

c)                                   This exercise shows that while the government has no intention to increase their contribution beyond 1.16 per cent and will also not ask the employer to make some additional contribution for the social benefit of the employees. The contribution of employers towards PF and pension fund collectively remains static and the suggestion of the expert committee now is to divert its entire contribution of 12 per cent to pension fund means further robbing of the provident fund accumulations of the members. The PF benefit is already under severe strain in view of the diversion of 8.33 per cent of employer’s contribution and any further diversion will add to the misery and is thus not acceptable.

d)                                  The recommendation does not say a single word on the revision of pension for the existing pensioners rather they have suggested in their recommendation number one that the pensioners existing as on cut-off date (say April 1, 2011) shall be compensated by providing a lump sum commensurate with the age and amount of pension of the pensioner.    The number of pensioners who are getting pension on the following brackets as on March 31, 2008 is a clear example of how meager the pension amount is.

 

Pension amount per month	Number of pensioners
Upto Rs 300	1,82,790
Rs 301 - Rs 400	2,26,807
Rs 401 - Rs 500	2,43,654
Rs 501 - Rs 1000	8,66,705

 

While the number of member pensioners as on March 31, 2008 was 18,05,012, number of pensioners getting less than Rs 500 per month was 6,53,251 i.e more than one third of the pensioners are in receipt of monthly pension at the rate of Rs 500 or less. Similarly the number of pensioners receiving pension below Rs 1000 per month was 15,1995 which accounted for 84 per cent of the total pensioners. There must therefore be arrangement for enhancement of the minimum pension for all old and existing pensioners to a level by which one can sustain his livelihood.

 

Conclusion

·                                            Fast track mechanism should be immediately set up to make all contribution records to EPS-95, “complete” and “consistent”.

·                                            There is a general trend from the government as well as employers corners to publicise that there is employer’s contribution in the EPS 95 which is not at all correct. The employees’ provident fund scheme when first introduced during 1951, same rate of contribution by the employee and employer were remitted to the provident fund account. With the introduction of FPS 1971, much to the objection of the trade union movement, 1.16 per cent of contribution of the employee and employer were both diverted to the family pension fund. In the EPS 95 again in spite of strongest resistance, the government arranged diversion of 8.33 per cent of the employer’s share in the provident fund to pension fund. Historically therefore this cannot be treated as employers contribution, it is only diversion of the fund from one account to the other. It is imperative therefore to ensure some significant contribution of the employers in true sense to the pension fund for strengthening the scheme.

·                                            Further, recovery of outstanding dues from the defaulting establishments will also strengthen the scheme. There must be stringent punishment for the defaulting establishments. The officials having connivance with the defaulting establishments should be identified and severely punished. It has now become clear to all the employees that employees’ pension scheme 1995 is not at all beneficial to the workers. Within the framework of defined benefits, EPS 1995 can be made beneficial only through enhancement of employer’s as well as government’s share without affecting the present rate of contributions in the EPF as well as enhancing the wage ceiling. All withdrawn or curtailed benefits i.e., the benefits of return of capital and commutation of pension and enhanced rate of reduction for early pension are required to be restored immediately. The parliamentary standing committee on labour in its 39^th report has also strongly recommended that the formula regarding rate of contribution should be revised at periodic intervals wherein the rate of contribution from the government should at least be fixed at half of the rate of contribution which is being made by the employer. The committee has also recommended restoration of the withdrawn/curtailed benefits.

·                                            The expert committee has based their calculations on the basis that interest return on investments will be around 7.5 – 8.0 per cent. In a scenario of economic downturn the market rate of interest may plummet to any level, as we know in USA it is 1 per cent and in Japan it is 0.5 per cent and in some cases the establishments are big defaulters. Yet the social security schemes are operating because governments’ contributions have made the schemes sustainable. The government must decide whether to have a social security scheme at all for the workers. If the answer is positive then such a scheme cannot be framed upon 1.16 per cent contribution and market rate of interest earning on deposits. The government must come forward to meet the biggest and most important social responsibility to provide adequate social security benefit to workers. The social security of workers issue has earned utmost importance and priority internationally by all governments, ILO and even some corporates because economic downturns have made the workers most vulnerable. The government of India cannot just say that we will give 1.16 per cent on contribution and the rest you manage. We wonder how the actuaries can help us in this matter. The question before us is not mathematical calculations but a major policy decision.