Employee pension scheme to be merged with New Pension Scheme

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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