Mumbai: Tens of millions of workers risk having their monthly pension benefits cut drastically because of a government decision to change how it calculates retirement payments.
In a notification dated 1 October, the labour ministry said pensions will now be based on average monthly salaries drawn through the entire period of an employee’s contribution to the Employees’ Pension Scheme (EPS), instead of the last 12 months as has been the practice.
Although a notification means the new rules are effective immediately, pension officials are still considering the implications of the change, which could take some time to come into force.
The new rules, on the face of it, will apply to those now contributing to the pension fund, resulting in a sharp cut in payouts when they retire.
More clarity on whether the change will apply to current beneficiaries and contributors, as well as those who will contribute in the future, can be had only when pension officials themselves study the nuances of the notification.
The monthly pension an employee receives after retirement is the product of average monthly income and the number of years of contribution to the scheme, divided by 70.
The new system will lower the numerator in this equation, and likely affect retirement benefits for about 8.5% of the 516-million-strong workforce in India, or the 44 million employees who contribute to the pension fund, according to human resources consulting firm Mercer Consulting (India) Pvt. Ltd.
“As per the new notification, the pension that an employee receives after retirement could be considerably reduced,” said Gautam Kakar, business leader of retirement benefits consulting at Mercer.
The notification comes amid continuing debate on pension reforms intended to maximize returns by engaging fund managers, increasing the cap on equity investments and other measures.
“The basic fault lies in the investment guidelines and if the government does not change these guidelines, the gap in pension funds will be large, and they will have to renege on the promise of pension payments,” said U.K. Sinha, chairman and managing director of UTI Asset Management Co. Pvt. Ltd.
Between June 2002 and October 2005, when he was joint secretary in the department of economic affairs at the ministry of finance, Sinha was in charge of pension reforms, and was responsible for drafting the Pension Funds Regulatory and Development Authority Bill, 2005. Even at UTI Asset Management, Sinha has been active in the pensions space, responsible for starting the company’s micro-pension initiative for workers in the so-called unorganized sector.
Changing how the government calculates pension payments is one way it can renege on its payments promise. Another, as has been done in countries such as the UK, Italy, Germany and Australia, is to progressively increase the retirement age of employees so the pension fund’s corpus swells, Sinha said.
Tapan Sen, secretary of the Centre of Indian Trade Unions, the labour union affiliated to the Communist Party of India (Marxist), said he was not aware of the proposed change. Sen said he was travelling, but would look into it after he returns to Delhi. “We strongly oppose any change in how the pensionable salary is determined,” he said.
The new notification has seemingly confounded even the Employees’ Provident Fund Organisation (EPFO), the body in charge of administering this pension fund.
Two regional commissioners of EPFO that Mint spoke with said a workshop has been organized on 8 November for the fund’s officials to discuss and understand the implications of this notification. The commissioners asked not to be named as they are not authorized to speak with the media on government policy. The notification has also done away with a previous clause in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which had excluded those earning more than Rs6,500 per month in basic salary from mandatorily contributing to the Employees’ Provident Fund (EPF).
“The October notification could mean that all Indians, including those earning over Rs6,500 in basic salary, have to contribute to EPF,” said Mercer’s Kakar.
Both the pension fund and pension scheme are managed by EPFO.
Under existing rules, 8.33% of the basic salary of an employee earning Rs6,500 or less had to mandatorily go towards EPS and 3.67% towards EPF.