Labour Ministry to take up case of EPS

Insurance scheme which offers Rs 1.30 lakh insurance on death of worker in fact reporting surpluses

The Pension Fund Regulatory and Development Authority  (PFRDA) Act has finally given a statutory boost to the New Pension Scheme while the future of the other pension scheme, the Employees Pension Scheme run with contributions from employers, employees and Government is looking shaky,

The Labour Ministry and Finance Ministry are continuing their arguments over whether EPS should be folded up and the former is all set to take up the case of EPS with the Finance Ministry this month, sources say.

One of the arguments it has prepared in defence of EPS is that EPFO offers subscribers not just pension but a widow's pension and an insurance scheme which comes virtually free of cost to all concerned.

The insurance scheme which offers Rs 1.30 lakh insurance on the death of a worker is in fact reporting surpluses and the insurance amount is likely to be raised to 1.80 lakh. The scheme is currently reporting a surplus of Rs 12,000 crore, according to the ministry.

PFRDA chairman Yogesh Agarwal when asked about these schemes told Business Standard that these are freebies offered by EPFO for which the Government has to pay subsidies.

Labour Ministry says that the insurance scheme or the widows pension is social security that is not funded by Government subsidy. It is a self sustaining scheme which is built by the savings of the employees.

The other argument in defence of the EPS is that returns on the investment of the contributions of employers and employees are not affected by market fluctuations.

Labour Ministry has also argued that in the case of NPS nothing tangible gets accrued to the account of the members each month while in the case of EPS every return is credited to the member’s account not to be touched till the last.

The returns in NPS depend on luck and if the member were to retire in a year like 2008 when the market fortunes had nose-dived, the member stands the risk of having his entire savings wiped out, points out an official.

The ministry has also pointed out that EPFO returns outscores all except three corporate schemes in the matter of returns. Only three corporate schemes run by SBI, Kotak and ICICI fared better than EPFO out of 20 schemes as on September 6, this year, it has pointed out.

Labour Ministry has also claimed that EPFO charges nothing on managing EPS. Even disbursal of pension is done free of cost to the subscriber. On the other hand, subscribers of NPS get 60% of their savings after 58 years and the remaining as annuity. The NPS then charges for disbursal of the annuity.

Charges are deducted from the number of units the subscriber has accumulated, and these go towards four types of charges viz CRA, Point of Presentation, PFM and Custodian charges.

According to calculations by the ministry close to four% of the total assets of the NPS subscriber is lost in these charges.
The ministry has dismissed fears that the EPS may over the years accumulate huge deficits and may become a liability for the government. It cites an analysis by the World Bank to say that no such problem was forseen till 2075.

According to Gautam Bharadwaj who was part of the committee that drafted the OASIS report which led to setting up of PFRDA, the EPS and NPS can co exist, but the EPFO needs urgent reforms.

It needs to introspect and make changes within a given timeline, he says.He also dismisses the assumption that savings of NPS members can be wiped out by market fluctuations. That is not true. The way the scheme is designed, investment in equity gets reduced as the worker nears retirement.

(box q and a Gautam Bharadwaj who was part of the study to explore pension reform. It resulted in the OASIS report in 2000 that lay the foundation for New Pension Scheme.

Arguments for EPS

^{EPS is more than pension. It offers insurance, widows childrens pension
 
EPFO charges nothing to run pension scheme}

EPFO returns outscored only by three corporate schemes of SBI, Kotak and ICICI

Every growth in returns credited to member’’s account, while nothing tangible credited to account in NPS

EPS not affected by market fluctuations

Arguements against EPS

<sup>EPS is a liability for Government. It costs Govt Rs 1800 crore annually

EPS and EPFO members dont have individual accounts. So EPFO is in the dark about its own resources

EPS investments give meagre returns as investment guidelines are spelt out by trade unions not fund managers

NPS has got higher returns upto 14% compared to EPS's 8.5%.</sup>