The EPFO’s ATM plan is good but it must resolve its pension muddle first

While this would be welcome, the EPFO also finds itself being held responsible for a pension crisis that has put about 1.75 million retirees in dire straits, pushing many to despair. It speaks not just of the EPFO’s functional inefficiencies, but also its structural flaws.

It also highlights the superiority of an alternative retiral scheme that the government created for its own employees and then threw open to the private sector: the National Pension System (NPS).

The crisis has its roots in an ill-designed pension started by the EPFO in 1995 that was funded with a little over two-thirds of the employer’s mandatory contribution of 12% of an employee’s salary to the fund.

The pension payout has no link with the returns generated by investing the corpus. It is one-seventieth the product of one’s length of eligible service and the average pensionable salary of one’s final 60 months before retirement at age 58.

Also read: India needs to shake up its new political-economy consensus

For a while, employees had the option of contributing a share of their total salary, rather than the cap—raised in steps from ₹5,000 a month to ₹15,000—for mandatory PF participation. This would raise their pension. When the option was withdrawn, employees challenged it in court and won.

The EPFO appealed against this at the Supreme Court, which in November 2022 ruled against it and gave serving as well as retired employees a four-month window to exercise the higher-pension option. For that, employees and employers who had made contributions as a proportion only of the pensionable salary cap, not of total salary, had to pay past dues.

Those who had retired, receiving as their PF payout a sum including the employers’ contribution that they now wanted going into higher pension, had to repay that amount to the EPFO, which was given eight months by the top court to pay pensions.

More than 1.76 million pensioners exercised the option, but the EPFO has only issued pension orders for 16,000 retirees so far. The rest are left hanging, many paying rather than earning interest on money deposited with the entity for their applications to qualify.

Also read: Pension alert: Even the unified scheme could acquire a sell-by date over time

It is unfair of the EPFO to subject retirees to such prolonged uncertainty over their financial means. Here is what it could do. Transfer back to higher-pension applicants, along with interest, the amounts they have submitted—but to ABSA accounts of the type used to apply for shares in public offers.

Application Supported by Blocked Amount is a format familiar to banks and individuals. These transfers would let employees get at least some returns on their funds in savings accounts. In addition to its IT upgrade plan billed as EPFO 3.0, the EPFO should outsource the processing of applications to get it done within a month’s time.

The government could lend it the funds it needs to pay out pensions, borrowing from the EPFO itself if required. In general, while flexible new options for its pension scheme (as reportedly being planned) may find takers, the EPFO should amend its investment norms to generate better returns.

Its corpus is large enough to let a diversified portfolio across assets spanning the entire risk spectrum perform its magic of generating high returns while minimizing risk. If the EPFO is reluctant to do this, the government might as well roll all PF accounts into the NPS.

Also read: Unified Pension Scheme: a suitable compromise for pensioners?