Home / Money / Personal Finance /  Can EPFO bear the additional financial burden of higher EPS?

The Supreme Court recently allowed individuals to apply for Employees’ Pension Scheme (EPS) deduction on their actual salary over and above the 15,000 limit laid down previously by the Employees’ Provident Fund Organization (EPFO). By doing this, it has opened the doors for much higher pension payouts to workers which, in turn, puts a much greater financial burden on the EPFO. Neil Borate asks experts whether or not the EPFO can afford to pay higher pensions

EPFO will have to bear significant shortfalls

Ritobrata Sarkar, Willis Towers Watson
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Ritobrata Sarkar, Willis Towers Watson

Ritobrata Sarkar, Head, retirement, Willis Towers Watson

The verdict comes as a positive for those earning in excess of Rs15,000 per month, but let’s not underestimate the financial burden it may place on EPFO. The main question is whether an 8.33% contribution to EPS is enough to fund the EPS benefit obligation on uncapped salaries. Based on calculations, the answer is a definite no.

Actuarial calculations for just one sample member reveal that even with additional contributions (and a portion of the past EPF corpus) being diverted towards EPS, EPFO will need to bear significant shortfalls. The vast range of salaries makes it difficult to extrapolate this to the broader EPFO membership. However, it will be enormous due to the impact of high earners. Also, increasing life expectancy and falling interest rates could make EPS financially unviable in the long term.

Unsustainable already, changes will add to burden

Preeti Chandrashekhar, Mercer India
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Preeti Chandrashekhar, Mercer India

Preeti Chandrashekhar Business leader, retirement, health and benefits, Mercer India

This ruling could accentuate the issues of EPS. The assessment of its financial position and, hence, the financial viability of the above feature is fraught with challenges. It is common knowledge that EPS pension on capped wages is unsustainable at the current levels of contribution and funding and the new changes will only add to the financial stress.

The ruling will impose a burden on employers and EPFO in terms of transfer of funds between EPF and EPS, re-computing old contributions etc.

The lack of reliable data is another issue that needs to be sorted out to assess the current impact, projection of future liabilities as well as assessment of the experience of the subscribers. Aggregate assessments of the financial viability will also pose a threat on the ability to keep promises under EPS.

Accumulation is tiny against the payout being advised

Kartik Jhaveri, Transcend Consulting (India)
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Kartik Jhaveri, Transcend Consulting (India)

Kartik Jhaveri, Director, wealth management, Transcend Consulting (India)

I had taken a simple mathematical working. Say a person is earning 20,000 per month. Over the next 25 years, every year if the increment is 10%, his salary would be around 2 lakh. Based on the EPS formula, pension works out to about 70,000 per month. If 8.33% of 20,000 is contributed, even then the cumulative contribution does not work out to more than 20 lakh. From 20 lakh, how is it possible to pay out 8.40 lakh per year. This works out to be almost 40% of the accumulated corpus every year. The accumulation is tiny against the payout being advised. Today EPS is paying a pension of 5,000, which is sustainable. Who will contribute more? There is a limit to how much the employee can contribute. The employee can divert more of his EPF amount to EPS but there is still a question on whether this is enough.

Ruling should be applicable to low-income pensioners

Shyam Sekhar, iThought
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Shyam Sekhar, iThought

Shyam Sekhar, Ideator and founder, iThought

The current EPS system was made for a much smaller base of members. Subsequent policy changes by EPFO were not matched by actuarial changes. The recent Supreme Court order has only made the EPS problem acute.

The problem is that the scheme is now trying to apply an older scheme to newer segments with bigger needs. The idea of opening up EPS to today’s much larger EPFO membership requires to be supported by changes in the scheme. The scheme must distinguish between low- income and high-income pensioners and secure both with adequate actuarial structure. The Supreme Court formula should be made applicable only to low-income pensioners. The EPS formula can be sustained in its present form if it is adequately supported, segmented, financed and structured.

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