• UGI USER
  • Feb 15, 2024
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PENSION CONCERNS: ON THE EPFO RECOMMENDATION

Relevance:

  • GS 2 – Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.
  • GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Why in the News?

  • The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) has recommended a higher interest rate of 8.25% for the financial year 2023-24.
    • It has recommended a 1-percentage-point increase in PF deposits for 2023-24.
    • The proposed rate marks the highest interest rate for EPF subscribers in the past three years.
  • This interest rate applies to EPF subscribers, totaling over 29 crore, with approximately8 crore being active contributing subscribers.

Comparison with Previous Years

  • The recommended interest rate of 8.25% for 2023-24 is 0.4-percentage points lower than the rate in 2018-19.
  • Notably, 2018-19, like 2023-24, was a pre-election year.
  • Financial Implications: If approved by the Union Finance Ministry, the recommendation would involve transferring a record ₹1,07,000 crore to EPF members.

Minimum Pension Implementation

  • Since September 1, 2014, a minimum pension of ₹1,000 per month under the EPS has been provided through budgetary support, benefiting around 20.5 lakh pensioners.
    • Though, the BJP advocated for a ₹3,000 minimum pension, when in opposition.
  • This information was disclosed in an action taken report (ATR) presented recently in the Rajya Sabha, alongside the response of a query regarding the status of implementing recommendations from the 147th report of the Committee on Petitions, also known as the Bhagat Singh Koshyari Committee report.
  • Implementation of Recommendations:
    • The government considered panel recommendations and implemented feasible ones administratively and financially.

Concerns Regarding Minimum Pension

  • Increasing the minimum pension: The government should consider that the difference between the minimum and original pension amounted to approximately ₹970 crore for 2022-23.
    • Doubling the minimum pension would not impose a significant financial strain based on this calculation.
  • Equating the amount of spouse pension with what a member-pensioner receives.
  • Rules regarding higher PF pension were formulated after a 2022 Supreme Court judgment, potentially leaving out most pre-2014 retirees;
    • There are approximately four lakh applications for higher pension pending.
  • Adopting a more comprehensive approach to PF pension matters would benefit senior citizens.

Finance Ministry’s Views

  • The Finance Ministry rejected a proposal to double the minimum pension, citing concerns about the substantial increase in budgetary support required under the Employees’ Pension Scheme (EPS), 1995.
  • The budgetary support also includes the Central government’s contribution at 1.16% of wages up to ₹15,000 a month.
  • For FY 2024-25, the Ministry projects ₹10,950 crore as budgetary support, compared to the revised estimate of ₹9,760 crore for the current year.
  • The Ministry argues that a 100% rise in the minimum pension would lead to a disproportionate increase in overall budgetary support, considering that many pensioners received less than ₹1,000 as monthly pension until 2014.

Employees’ Pension Scheme (EPS) Nature

  • The government described the EPS as a “Defined Contribution-Defined Benefit” social security scheme in the Rajya Sabha.
  • It asserted that all benefits were funded through contributions, highlighting an actuarial deficit based on the fund’s valuation as of March 31, 2019.
  • However, the EPFO’s annual report for 2022-23 contradicts this argument, suggesting that the actuarial deficit claim is not substantial.
Definition of Actuarial Deficit

●   Actuarial deficit is the shortfall between future Social Security obligations and the income rate of the Social Security Trust Fund at present.

●   It represents the variance between the anticipated payouts from the Social Security program in the future and the existing income rate of the program’s trust funds.

Significant Improvement in Actuarial Deficit

  • The Central government has reported a “significant drop” in the actuarial deficit of the Employees’ Pension Fund (EPF).
    • This improvement is attributed to enhancements in data quality concerning members of the Employees’ Pension Scheme (EPS), 1995.
  • Amendments based on recommendations from the actuarial valuation report and suggestions from the Union Finance Ministry have contributed to this achievement.
Some recommendations of Bhagat Singh Koshyari Committee

Amendments to Pension Scheme

●   It included changes in the calculation of pensionable salary, which shifted to a 60-month average instead of a 12-month average.

●   Eligible service determination was modified to base on contributory service rather than simple length of service.

Improvements in Data Collection and Valuation

●   Special efforts were made to gather information on members, leading to better data quality.

●   Valuation exercises for 2011-12, 2012-13, and 2013-14 utilized data from almost 60% of active contributing members and 100% of pensioners, enhancing reliability.

Replace EPS

●   Despite suggestions to conduct valuation every three years and replace EPS with a Provident Fund-cum-Pension Annuity Scheme, no consensus was reached during CBT meetings in September 2010 and January 2014.

●   Annual valuation was deemed necessary, and annuity-based scheme proposal was not pursued further.

Addressing Inflation and Efficient Management

●   Price rise neutralization in pension amounts to offset inflation was deemed infeasible due to the funded scheme’s features of defined benefits and defined contribution.

●   EFPO appointed fund managers in September 2008 for better corpus management, adhering to investment patterns prescribed by the Union Finance Ministry and guidelines set by EPF’s CBT.

 

Source: https://www.thehindu.com/opinion/editorial/pension-concerns-on-the-epfo-recommendation/article67845880.ece

https://www.thehindu.com/news/national/tamil-nadu/significant-drop-achieved-in-epfs-actuarial-deficit-centre-informs-rajya-sabha/article66660810.ece

Mains question

In the context of the recent Employees’ Provident Fund rate hike recommendation, discuss the potential socio-economic impact and the government’s role in balancing the interests of EPF subscribers. (250 words)