A HIGH actuarial deficit in the Employees’ Pension Scheme (EPS), reflecting the difference between the Net Present Value (NPV) of contributions and benefits, and a progressive increase in the number of pensioners going forward, are two key concerns the Employees’ Provident Fund Organization (EPFO) is grappling with as it is trying to implement a higher pension option for subscribers following a decision by the Supreme Court.
EPS is the social security pension scheme offered by EPFO to organized sector workers.
In its response during the Supreme Court case last year, the EPFO had pegged the pension fund’s actuarial deficit to rise to over Rs 15 lakh crore for implementation of the higher pension scheme after the Kerala High Court set aside the changes to the EPS in 2014, said two officials who are aware of the debate among those who manage the fund.
“The expected difference between the NPV of contribution and the NPV of benefit is very large, and this is one of the main reasons why the foundation opposed it in appeals in previous court cases,” said one of the officials mentioned above. But the Supreme Court decision gave some relief to EPFO, which reduced the number of members/pensioners who could benefit from higher pension options.
An official said the government is still in the process of figuring out the actuarial shortfall following the Supreme Court verdict. “It will be higher than what is indicated in the latest annual report of EPFO but certainly will not be as high as Rs 15 lakh crore assumed after the Kerala High Court judgment,” the official said.
The total number of pensioners under EPS has more than doubled to 72.73 lakh in 2021-22 compared to 35.10 lakh in 2009-10. “In the coming years, given India’s demographic dividend, the inflow to the pension fund in the EPS is expected to be high given the addition to its membership. But as this gradually declines, the number of retirees will be out of proportion to the number of existing members or new entrants. It is where the problem sets in,” said another government official.
According to the report of the Technical Group on Population Projections for India and States 2011-2036, 73.5 million people or 60.7 percent of India’s population in the working age group – 15-59 years – in 2011 and this population group is expected to increase to 98.85 crore by 2036. While the working age population is likely to decline thereafter, due to increasing life expectancy, India’s population in the age group of 60 years and above is expected to increase from 10.15 crore in 2011 to 22.74 crore in 2036.
In the Supreme Court, the EPFO is learned to have quoted an actual calculation of 21,000 pensioners detailing the difference between their contribution and advance payment of pension arrears to be over Rs 250 crore. In addition, their monthly pension had increased by more than three times to almost 15 billion. Rs.
In a defined benefit plan, the actuarial deficit is the difference between the fund’s assets and the present value of its liabilities (future payment obligations) under a specific set of valuation assumptions. EPS – although described by the EPFO as a defined contribution and defined benefit scheme – is a scheme that leans more in favor of defined benefits than defined contributions.
The question of the expected actuarial deficit of EPS was flagged in the latest annual report of EPFO for 2021-22, which stated that under EPS, given the increase in the number of pensioners, the amount paid as pension has shown a steady increase in compared to the years, although “the fund has consistently had more income than disbursements” since its inception. “However, the fund has not witnessed any cash flow problems so far despite there being an expected actuarial shortfall in the valuation of the fund,” it noted.
As per the EPFO report’s combined valuation results as of On 31 March 2016 and 31 March 2017, the pension fund’s net liability amounted to DKK 15,531.91 million. Rs. against a profit of DKK 5,026.87 million. Rs. on 31 March 2015. the obligation for the previous year per 31 March 2014 was 7,832.74 million. Rs.
The value of the pension fund corpus stood at Rs 3.18 lakh crore, according to the combined report for 2016 and 2017, while the present value of future contributions was Rs 4.04 lakh crore. This adds up to Rs 7.22 lakh crore, which when compared to the present value of benefits of Rs 7.38 lakh crore, resulted in a net liability of Rs 15,531.91 crore.
A detailed query sent to EPFO by The Indian Express on this issue remained unanswered.
Unions have flagged concerns over the link from EPFO to avail the higher pension option, stating that it first asks if the subscriber had opted for a higher pension benefit while joining the EPS-95 scheme, which most had not chosen, and thus, the link is programmed to deny the eligible pensioners the benefits of the Supreme Court judgment.
Why retirement is a concern
The actuarial deficit, or the difference between the present value of benefits and contributions from all members, may be manageable now, but is expected to rise sharply in the coming decades, as the number of retirees increases. The government is keen to ensure that this does not jeopardize social security for low-paid workers.
In a series of letters to the EPFO earlier this month, the Center of Indian Trade Unions (CITU) had also raised doubts about the disclaimers on the portal. In its letter, it mentioned how the subscribers opting for the higher pension benefit will have to submit an affidavit authorizing the central government to amend the scheme “as it may think fit”.
“As such, the pension calculation formula has already been specified/defined in the scheme … why is such a disclaimer inserted?” the letter said. Some retirees have also filed writ petitions in various state high courts.
EPFO has extended the deadline for opting for higher pension to May 3 from the March deadline earlier. In a ruling on 4 November, the Supreme Court had upheld the changes to the Wage Earners’ Pension Scheme, 2014, which meant a new chance for employees who were existing EPS members on 1 September 2014 to contribute up to 8.33 per cent. ‘actual’ wages – against 8.33 per cent of pensionable pay capped at Rs 15,000 per month – for pension.
EPS gives employees a pension after they reach the age of 58, if they have served at least 10 years of seniority and have retired at the age of 58. The monthly pension is calculated based on this formula: Monthly pension = pensionable salary x pensionable service / 70, per a pro rata basis linked to maximum monthly pensionable pay of Rs 6,500 for pensionable service till September 1, 2014 and Rs 15,000 thereafter.