Column: Hurtling towards bankruptcy

Sep 16 2013, 05:09 IST
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SummaryThe pension scheme’s fundamental flaw is combining a defined benefit with a defined contribution

The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPFO Act) was enacted in 1952 to provide social security to the workers working in the organised sector companies, both private and PSUs which are covered under the Act.

The objective is to provide the workers with funds when they need it, for specified purposes like medical treatment, education, house building, etc, for which ordinary workers would not be able to access loans from banks, etc. It was on the same lines as the government provident fund (GPF) for government employees.

It was not intended to be a pension fund for workers. Although a pension component was added in November 1995, it is primarily a provident fund organisation, and on an average about 60 lakh withdrawals are made from the fund for the eligible purposes, including at retirement, through the 120 offices of the organisation.

The National Pension System (NPS), now to be covered under an Act, is primarily for government employees, and replaces the ‘defined benefits’ through budget provisions, with ‘defined contributions’ into individual pension accounts of government employees who joined service after January 1, 2004. There are no ‘defined benefits’ and only at the end of service the accumulations in the pension fund (60% of it) is to be invested in the annuity scheme of an insurance company for getting monthly pension, and the rest returned in cash. There is no provision to withdraw during service period in the scheme.

Now let us examine how the pension fund of EPFO works. The pension scheme was introduced in November 1995 by diverting 8.33% of employer contribution to provident fund, into a pool fund (pension fund) without individual accounts being kept (the contribution to provident fund for workers is 12% by employers, and 12% from employees). Even this 8.33% of contribution to pension fund is only up to a wage of R6,500 per month, or a contribution of R542 per month, which is the upper ceiling on wages for pension. If an employee leaves his job or retires before 10 years of service, his pension contribution (which is based on a formula, not very scientific or logical) is returned to him along with his provident fund dues.

In addition to having defined contribution to the pension fund as described above, the pension is also a ‘defined benefit’, which, putting in simple terms, is equal to 50% of his average 12-month wage at retirement, with 30-year service,

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