The Parliament nod to the PFRDA Bill has triggered a heated debate on the performance of the National Pension System (NPS) offered under the PFRDA and EPS run by the Employees Provident Fund Organisation (EPFO). Debates are healthy and important tools in a democracy to weigh the worth of ideas and should be welcomed but they must be informed and bring out all aspects of the topic under consideration.
Citing reams of statistics on returns, projections and some recent media reports comparing the two have drawn conclusion that EPS of EPFO is inefficient when compared with ‘promising’ NPS, hailed as a panacea to the problem of providing old age social security for the working population. But before pronouncing the verdict, can we spare a thought on whether it is a case of their apples are sweeter than my oranges!
To start with, EPFO manages three separate schemes namely Employees Provident Fund Scheme 1952 (EPF), Employees Pension Scheme 1995 (EPS) and Employees Deposit Linked Insurance Scheme 1971 (EDLI). Of the three, only one, the EPF scheme, is comparable to NPS’s scheme. The EPF scheme is an individual account scheme where the member’s contribution (12% of wages) and 3.67% of the wages comprising of the employer’s contribution is received and the funds are invested to earn interest which is distributed as annual dividend. Also, the returns flow to the members’ account and are not subject to change with fluctuations in market yields.
NPS is also an individual account scheme where a member’s contributions are received and are invested in the securities. The final accumulation of the fund is partly utilised to purchase annuity as monthly pension. EPS, on the other hand, is a pooled account, defined contribution and defined benefit scheme. The employer contribution of 8.33% of the wages and the government’s contribution of 1.16% of the wages (limited to a wage ceiling of R6,500) go to EPS pooled fund. The benefits are in the form of member pension, widow pension, children pension, dependent parent pension, orphan pension and disability pension. These benefits are carved out from one single pool of fund.
Comparing NPS with EPS, to use an often used cliché, is like comparing an apple to an orange. However, NPS can be compared with EPF as both are defined contribution individual member accounting schemes. The funds for both the schemes are invested in the market, albeit EPFO has not ventured into the equity market