The Employees’ Pension
Scheme (EPS), which provides retirement benefits to about 85.5 million
subscribers of the Employees Provident Fund (EPF), may soon be merged with its
rival, the New Pension Scheme (NPS).
The finance ministry has
asked EPS, run by the Employees’ Provident Fund Organisation (EPFO), a
statutory body under the labour ministry, to close down and shift its
beneficiaries to NPS ‘on a mandatory basis’.
NPS is run by the finance
ministry with no contribution from the government or any guaranteed benefits to
subscribers.
EPS should be wound up or
‘grandfathered’, said Finance Minister P Chidambaram in a letter to former
labour minister Mallikarjun Kharge in August 2012.
Incidentally, a World Bank
study using PROST (Pension Reform Options Simulation Toolkit) model had in July
2011 certified EPS as a sustainable scheme. ‘In view of the size of the scheme,
the base shortfall is insignificant because if assumptions are even slightly
modified, the shortfall turns into a surplus,’ the study noted.
Chidambaram’s letter to
Kharge was recently followed up with a meeting between officials of the EPFO,
Pension Fund Regulatory and Development Authority (PFRDA) and the finance
ministry, with the EPFO officials making a strong case for keeping EPS alive.
According to Chidambaram,
EPS’ guaranteed and defined benefits – the features that make it attractive to
subscribers – are untenable. ‘A defined benefit pension scheme like EPF with a
committed liability at the end would be subject to constant calibration of
either benefit structure or the contribution structure or a combination of both
to meet that liability. All this puts constant pressure on finances…’ he said
in the letter.
He added that the financial
viability of EPS was a concern and that any parametric change to EPS may not yield
to long-term financial sustainability of EPS. ‘It is recommended that EPS may
be grandfathered and all new employees covered under the Employees Provident
Fund and Miscellaneous Provisions Act 1952 may be brought under the New Pension
Scheme on mandatory basis rather than tinkering with the benefit structure to
guarantee a minimum pension of Rs 1,000.’
The letter suggested the
government had for long been considering shutting down EPS. ‘In view of the
persistent deficit in the EPS, it has been suggested repeatedly by the
Department of Financial Services that it would be better to cap the financial
liability of the Government by closing EPS at the earliest and switching over
to NPS.’
Chidambaram suggested that
officials in the ministry and PFRDA would engage with officials in the labour
ministry to work out the modalities of the transition. He added that while on
the hand, switching over to NPS would be beneficial for the employees as they
would get decent returns and adequate pension, on the other, the government
would be free from any open-ended and financially unsustainable liability of
EPF.
EPFO officials said that
the pension scheme is becoming a victim of turf war between different
government departments. ‘Each department wants its scheme to survive,’ said an
official.
The NPS architecture is
based on strong IT infrastructure, which allows prompt client servicing and can
provide real-time information on investment returns… Further, it is
cost-effective and provides portability of account, Chidambaram said in the
letter.
Source: Business
Standard
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