What is the EPFO’s higher pension option?

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What does the new EPFO circular say?

• The EPFO instructed its field officers to allow the option for higher contribution by:
• Employees and employers who had contributed on salary exceeding the wage ceiling of Rs 5,000 or 6,500.
• Those who did not exercise the joint option (by employer and employee) while being members of Employees’ Pension Scheme (EPS 95).
• Those who were members prior to September 1, 2014 and continued to be a member on or after that date.
• Employees who had already contributed on higher wage but not exercised the option formally will be required to submit an application at the EPFO regional office. T
• The circular said that in case of the amount requiring adjustment from provident fund to pension fund, and any re-deposit to the fund, explicit consent of the employee will be given in the joint option form.
• In case of transfer of funds from exempted provident fund trust to pension fund of EPFO, an undertaking of the trustee shall be submitted. 
• In case of employees of unexempted establishments, refund of requisite employer’s share of contribution, the same shall be deposited with interest at the rate declared under Para 60 of EPF Scheme, 1952, till the date of actual refund.

What does this mean for EPFO and members of EPS?

For EPFO:

• This will mean a stream of sharply higher pension payouts, when linked to actual basic salary rather than the Rs 15,000 ceiling. 
• Experts said the pension scheme does not entail defined benefits but involves defined contribution, which could create strain on the finances of the retirement fund body in future.
• For instance, an employee may have worked, and contributed for pension for 10 years, but after superannuation at age 58, will get a pension until death, which could be a period far exceeding the contributory period of 10 years. 
• The payouts could extend beyond the death of the member, with a provision for pension to the dependent family members as well.

For members and employers:

• This would essentially imply higher annuity after retirement. 
• The choice for a higher pension would then involve transferring of funds from the provident fund to the pension fund going back until September 2014.  
• In times of higher inflation, and with actual salaries having risen way beyond the pensionable salary cap of Rs 15,000, this would provide better social security cover for workers after retirement. 
• Only a negligible percentage of EPFO members — with salaries higher than the Rs 15,000 a month pensionable salary cap — had earlier opted for contributions based on actual salaries; more employees are now expected to opt for the higher pension scheme.

Current  pension structure-

• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 did not provide for a pension scheme. 
• The EPS, administered by the EPFO, came into being in 1995. The pension fund was to comprise a deposit of 8.33% of the employers’ contribution towards the PF corpus.
• Both employees and employers contribute 12% of the employee’s basic salary, dearness allowance and retaining allowance, if any, to the EPF. 
• The employee’s entire contribution goes to EPF, while the 12% contribution by the employer is split as 3.67% to EPF and 8.33% to EPS.
• The Government of India contributes 1.16% for an employee’s pension. Employees do not contribute to the pension scheme.
• At the time of introduction of EPS, the maximum pensionable salary was Rs 5,000 per month. 
• This was subsequently raised to Rs 6,500 and, from September 1, 2014, to Rs 15,000. 
• The pension contribution currently is 8.33% of Rs 15,000, that is, Rs 1,250 — unless the employee and employer have opted to contribute at actual basic salary exceeding the pensionable salary.

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