Pensioners to lose if EPFO hikes retirement age for EPS

While the monthly payout will rise marginally, subscribers will have to forgo a significant sum for two years

Those approaching retirement are somewhat unhappy at the Employees’ Provident Fund Organisation (EPFO)’s proposal to raise the age limit for vesting pension under the Employees’ Pension Scheme (EPS) from 58 to 60.

Under EPS, private sector employees receive pension once they retire after completing at least 10 years of service. Of an employer’s contribution to the provident fund, a part goes towards this.

According to rules, an employer has to contribute 8.33 per cent of the basic salary or Rs 1,250 (whichever is lower) a month towards EPS. Unlike the Employees Provident Fund (EPF), this does not receive interest. The component that can increase a subscriber’s payout is the number of years of service.

The formula to calculate monthly pension is (pensionable salary X pensionable service)/70.

Let’s consider a person retiring after 35 years of service, with a basic salary of Rs 50,000 a month in the last year of employment: The highest pensionable salary the EPFO considers is Rs 15,000, even if a person earns more. And, if a subscriber has worked for more than 20 years, the government gives a bonus of two years. As such, in this case, the pensionable service will be 37 years (35 + 2). The monthly pension will be Rs 7,929 ((15,000 X 37)/70).

If EPFO trustees accept the new proposal, one’s pensionable age will increase by two years. The monthly payout in the case cited earlier will be Rs 8,357. To avail of this benefit (Rs 428 a month), a subscriber will have to forgo the pension for two years (Rs 1.9 lakh in this case). If this is kept as a fixed deposit in State Bank of India (eight per cent interest annually), it could earn monthly interest of about Rs 1,200.

The proposal will help the retirement fund body to reduce the shortfall in the pension fund by Rs 27,067 crore. Reports suggest according to the government, it will also help subscribers accumulate a bigger corpus, as the payout is delayed by two years.

To further save on its funds, the retirement body is also considering doing away with the bonus two years it awards. This will further reduce the pension corpus.

Considering the payout remains constant, a subscriber is at the losing end, as the rising inflation will leave less money with him/her each year. “If a person invests the same amount his employer contributes to the EPS even in the worst-performing equity fund for three decades, the corpus will be far higher. Even long-term fixed deposits can beat this,” said Hemant Rustagi, an investment advisor.