<p>The confusion over pension schemes in India will likely worsen in the days ahead. On one hand, the reintroduction of the Old Pension Scheme (OPS) has become a poll plank, with even Karnataka studying states that scrapped the National Pension System (NPS), a contributory pension scheme regulated by the Finance Ministry’s Pension Fund Regulatory and Development Authority, to decide whether the state can reintroduce OPS. On the other hand, a Supreme Court judgement was required before the Employees Provident Fund Organisation (EPFO), which administers an Employee Pension Scheme (EPS) for workers engaged in factories, PSUs, and other establishments in India, permitted eligible employees to contribute a higher amount to their EPS accounts, reversing a cut-off linked to an earlier wage ceiling.</p>.<p>Since January 2004, all government employees barring members of the armed forces are mandated to submit to the NPS and contribute 10 per cent of their basic salary plus dearness allowance, with the government contributing an equal amount to the employee’s pension fund. Private-sector employee contributions to the NPS were made voluntarily; their employer’s contribution was totally optional. PSUs like BEML, factories, and other establishments were under the EPFO ambit.</p>.<p>So why the confusion? Under the OPS, retiring employees never contributed to their pension funds yet received 50 per cent of their last-drawn salary plus a dearness allowance on retirement. Their nontaxable pension was linked to inflation, increasing with Dearness Relief at periodic intervals. The retirement corpus of NPS pensioners, however, is market-based with uncertain outcomes; their nest egg has diminished due to inflation and price hikes. Naturally, employees prefer OPS, a defined benefit plan, instead of taking on market-related risks linked to an NPS corpus.</p>.<p>But this is disastrous for government budgets. According to an SBI report, the CAGR in pension liabilities is 34 per cent for all state governments. The pension outgo as a percent of revenue receipts is around 13.2 per cent for all states combined, 29.7 per cent of which is its own tax revenue. Of the committed expenditures of the states for interest, salary, and pension payments, 56 per cent come from state revenue receipts, what a tax payer pays as taxes. With the number of pensioners increasing every year, a state government’s balance sheet is stretched beyond redemption. After paying pensioners, there is no money left for development, welfare, or infrastructural growth.</p>.<p>Those under the ambit of EPFO with its pension fund, EPS. are in a different vortex. Employees have mandatory EPF and EPS accounts, and while 12 per cent of their basic wage is deducted from their salary for EPF, the employer matches this with a 12 per cent contribution, with 8.33 per cent being split into EPS and 3.67 per cent into EPF. On retirement, the employee gets a lumpsum from EPF and a pension from the EPS.</p>.<p>It sounds simple, but for a twist. There was a statutory wage ceiling of Rs 15,000 per month that the EPFO used to calculate an employee’s EPS contribution. With no relief provided for inflation, the fixed pension amount employees got terminally in their sunset years was tiny. It required litigation and a November 2022 Supreme Court judgment before employees were allowed to opt for a higher EPS contribution based on actual wages and not the Rs 15,000 ceiling. But what of those who had retired during the interregnum but became eligible for retroactive claims? They were allowed to make ‘online submissions’ to the EPFO’s satisfaction!</p>.<p>Online submissions required EPS members who retired before September 1, 2014, to give EPFO documentary proof that they opted for a higher pension while in service and that EPFO rejected their request. When this option was discontinued by EPFO itself, how could any hapless employee have opted for a nonexistent option? Other pain points: the higher pension was fully taxable; one cannot transfer back the corpus once opted for; and the viability of receiving pension from EPS itself is in doubt considering the large base of eligible subscribers. Moreover, in the event of a subscriber’s death, the surviving spouse receives 50 per cent of the pension, a substantial loss indeed!</p>.<p>Pensionable employees are a worried lot, government employees long comfortable with OPS are reconciling with the migration to NPS; employees of PSUs and others struggle with online submissions and cut off dates, praying for their EPS pensions to remain viable in their life times. NPS pensioners are reconciling with pension fund managers, portfolio management services, and flexibility, hoping their corpus is not washed away by market forces before conversion to the pension annuity.</p>.<p>For current employees, it is a choice between NPS’s flexibility and the predictability of OPS and EPS. For the viability of government finances, the NPS’s pension fund makes sense. Only armed forces personnel deserve to keep their pensions as before.</p>.<p><em>(The writer is a former Executive Director and Member of the Board of Directors, BEML)</em></p>
<p>The confusion over pension schemes in India will likely worsen in the days ahead. On one hand, the reintroduction of the Old Pension Scheme (OPS) has become a poll plank, with even Karnataka studying states that scrapped the National Pension System (NPS), a contributory pension scheme regulated by the Finance Ministry’s Pension Fund Regulatory and Development Authority, to decide whether the state can reintroduce OPS. On the other hand, a Supreme Court judgement was required before the Employees Provident Fund Organisation (EPFO), which administers an Employee Pension Scheme (EPS) for workers engaged in factories, PSUs, and other establishments in India, permitted eligible employees to contribute a higher amount to their EPS accounts, reversing a cut-off linked to an earlier wage ceiling.</p>.<p>Since January 2004, all government employees barring members of the armed forces are mandated to submit to the NPS and contribute 10 per cent of their basic salary plus dearness allowance, with the government contributing an equal amount to the employee’s pension fund. Private-sector employee contributions to the NPS were made voluntarily; their employer’s contribution was totally optional. PSUs like BEML, factories, and other establishments were under the EPFO ambit.</p>.<p>So why the confusion? Under the OPS, retiring employees never contributed to their pension funds yet received 50 per cent of their last-drawn salary plus a dearness allowance on retirement. Their nontaxable pension was linked to inflation, increasing with Dearness Relief at periodic intervals. The retirement corpus of NPS pensioners, however, is market-based with uncertain outcomes; their nest egg has diminished due to inflation and price hikes. Naturally, employees prefer OPS, a defined benefit plan, instead of taking on market-related risks linked to an NPS corpus.</p>.<p>But this is disastrous for government budgets. According to an SBI report, the CAGR in pension liabilities is 34 per cent for all state governments. The pension outgo as a percent of revenue receipts is around 13.2 per cent for all states combined, 29.7 per cent of which is its own tax revenue. Of the committed expenditures of the states for interest, salary, and pension payments, 56 per cent come from state revenue receipts, what a tax payer pays as taxes. With the number of pensioners increasing every year, a state government’s balance sheet is stretched beyond redemption. After paying pensioners, there is no money left for development, welfare, or infrastructural growth.</p>.<p>Those under the ambit of EPFO with its pension fund, EPS. are in a different vortex. Employees have mandatory EPF and EPS accounts, and while 12 per cent of their basic wage is deducted from their salary for EPF, the employer matches this with a 12 per cent contribution, with 8.33 per cent being split into EPS and 3.67 per cent into EPF. On retirement, the employee gets a lumpsum from EPF and a pension from the EPS.</p>.<p>It sounds simple, but for a twist. There was a statutory wage ceiling of Rs 15,000 per month that the EPFO used to calculate an employee’s EPS contribution. With no relief provided for inflation, the fixed pension amount employees got terminally in their sunset years was tiny. It required litigation and a November 2022 Supreme Court judgment before employees were allowed to opt for a higher EPS contribution based on actual wages and not the Rs 15,000 ceiling. But what of those who had retired during the interregnum but became eligible for retroactive claims? They were allowed to make ‘online submissions’ to the EPFO’s satisfaction!</p>.<p>Online submissions required EPS members who retired before September 1, 2014, to give EPFO documentary proof that they opted for a higher pension while in service and that EPFO rejected their request. When this option was discontinued by EPFO itself, how could any hapless employee have opted for a nonexistent option? Other pain points: the higher pension was fully taxable; one cannot transfer back the corpus once opted for; and the viability of receiving pension from EPS itself is in doubt considering the large base of eligible subscribers. Moreover, in the event of a subscriber’s death, the surviving spouse receives 50 per cent of the pension, a substantial loss indeed!</p>.<p>Pensionable employees are a worried lot, government employees long comfortable with OPS are reconciling with the migration to NPS; employees of PSUs and others struggle with online submissions and cut off dates, praying for their EPS pensions to remain viable in their life times. NPS pensioners are reconciling with pension fund managers, portfolio management services, and flexibility, hoping their corpus is not washed away by market forces before conversion to the pension annuity.</p>.<p>For current employees, it is a choice between NPS’s flexibility and the predictability of OPS and EPS. For the viability of government finances, the NPS’s pension fund makes sense. Only armed forces personnel deserve to keep their pensions as before.</p>.<p><em>(The writer is a former Executive Director and Member of the Board of Directors, BEML)</em></p>