Editorial: The EPFO disadvantage

Sep 02 2014, 01:59 IST
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SummaryWhy not free up people to sign up for NPS?

Till some time back, the Employees Pension Scheme (EPS) portion of the Employees Provident Fund Organisation (EPFO) had a hole of around R50,000 crore in terms of the unfunded liability for future pensions, though a later study suggested this may be a lower R 10,000 crore. Many suggestions were made to fix this, and this included increasing the age at which the pension would accrue as well as increasing the number of people who would contribute to the EPFO and its EPS. What the government has done fixes the problem somewhat by ensuring that the pension will not be available to those new members who earn more than R15,000 per month—existing members who earn more than this will have to pay the government’s contribution of 1.13% of their basic to avail of this facility—and various other benefits have also been trimmed. But there is a larger problem that needs to be fixed. For one, if the scheme is fundamentally flawed—it is just not viable at current rates of interest—simply getting more members in doesn’t fix it; it only postpones the problem till such time the new contributions are not enough to meet the pension obligations either. Indeed, the finance ministry would do well to examine whether the scheme breaks even now—the minimum monthly pension of R 1,000 announced in the Budget, for instance, will have to be funded by the government as the EPS coffers cannot sustain this kind of outgo; will the finance ministry fund the difference each year?

The larger issue here, of course, is one of choice. Since increasing the mandatory wage ceiling for being a member of the EPFO has been raised from R6,500 per month to R15,000, this means around 4-5 million workers who were free not to be part of the

EPFO now have to become members. Why? If the idea was to promote savings for old age, the better option would have been to give people the choice of being part of the EFPO or the New Pension Scheme (NPS) which offers more flexibility—you can have more money in equity and can choose your fund manager—as well as significantly higher returns. It doesn’t help that, with its current charges, the EPFO is a very expensive fund manager, especially given the fact that its main investments are in low-yielding government and PSU paper—indeed, the EPFO board has decided it doesn’t want to invest in equity

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