Contribution-based pension accounts for new EPFO subscribers soon

The move will help higher-income group workers to get higher pensions and is aimed at making the pension fund of the EPFO, which is in deficit, more sustainable

Formal sector workers may soon have their own pension accounts with the Employees’ Provident Fund Organisation (EPFO) that will have benefits linked to their own share of contribution, rather than from a pool of funds.

The move will help high-income group workers get higher pension and is aimed at making the pension fund of the EPFO, which is in deficit, more sustainable.

“…amendments in the EPS, 1995, (Employees Pension Scheme, 1995) has been formulated and recommended to the government for grant of pension on the basis of accumulations in individual pension accounts of the members,” showed documents reviewed by Business Standard.

The defined-contribution system, under which “each member has individual pension account and the benefits admissible to the member are linked to the contribution received in the said account”, will be taken up for discussion in the meeting of the EPFO’s central board of trustees (CBT) scheduled on September 9. The meeting will be chaired by Labour and Employment Minister Santosh Kumar Gangwar.

However, the new system will be applicable for new private sector employees who join the workforce after the revised scheme is notified.

Employees contribute 12 per cent of their wage (basic pay and dearness allowance, or DA) towards these schemes with a matching contribution of 12 per cent from employers. Of this, 8.33 per cent of the employers’ share goes towards the EPS.

But irrespective of the contribution from employees towards their pension account, they receive a fixed pension which is based on a formula with pensionable salary being the monthly basic pay plus DA averaged over the last 60 months of a worker’s service. This is because the EPS fund is a pooled account and members receive monthly pension after attaining the age of 58 years with a condition that they have completed at least 10 years of service.

“Right now, irrespective of how much money a subscriber has deposited towards their pension account, the returns are independent of it as there is a fixed formula for computing pension. The new scheme will benefit subscribers with higher pay who will stand a chance to get better returns,” said Bharatiya Mazdoor Sangh General Secretary Virjesh Upadhyay, who is a member of the EPFO’s CBT. 

Upadhyay was part of the committee that made the recommendation to the EPFO. The committee felt the scheme will make the pension fund more sustainable in the long run.

At present, pensioners’ contribution of 8.33 per cent of wages towards the EPS is only for their wages up to Rs 15,000 a month. The pension amount is not deducted on higher salary. But the proposed change will ensure that 8.33 per cent of wages goes towards pension, without any income cap.

The subscribers will be allowed to withdraw money from their pension accounts if they are not employed with an establishment covered under the EPFO for two years or if they leave India to settle abroad, according to the proposal.

Till March 2020, there were more than 20 million active contributors towards the pension account of the EPFO.