The Supreme
Court of India, on 1 April, 2019 has ruled to give pension to all the retiring employees of private
sector on the basis of their full salary rather than capping
the figure at a maximum of Rs 15,000 per month on which the contribution is
calculated. The ruling came when a Bench led by the Chief Justice of India
Ranjan Gogoi dismissed a special leave petition (SLP) filed by the Employees
Provident Fund Organisation (EPFO) against a 2018 Kerala High Court order.
Earlier, in October-2018, a Division Bench of the Kerala High Court had
scrapped a notification [G.S.R.609(E) dated 22 August, 2014] issued by the EPFO
and directed the retirement body to give full pension to the subscribers of the
Employees Pension Scheme (EPS) against which the EPFO moved to the top court. The
Kerala High Court set aside various changes which were introduced in the Employees’
Pension (Amendment) Scheme that had drastically reduced the employees’ pension
eligibility.
It is widely
known that the pension under EPS is very low because EPFO capped the salary
used for computation of pension at Rs 15,000 per month. However, there is also
a cap in the contribution to the EPS which is just Rs. 1,250 per month (8.33%
of Rs 15,000). When the news was flashed that the employees covered by EPF will
now be eligible for pension as per their full last drawn salaries, my
colleagues and friends, including those working in other private sectors,
rejoicingly welcomed the apex court’s verdict anticipating their pension payout
likely to increase by manifolds. Perhaps, they missed the riddle of enhanced contribution to be made by the employees towards EPS which, according to the proposed system, will
be 8.33% of the “actual salary”. Therefore, when I raised my doubts by stating
that the revised pension proposal was “a hoax and anti-worker”, many of
them either comfortably ignored my statement or replied with very little faith
on my initial findings. Considering the fact that each step in the
socio-economic development has always been “accompanied by a corresponding
political advantage” of the ruling class, I had my fundamental position
very clear to ask myself whether there could be a net gain once the money is siphoned
from someone’s EPF account. Hence, a thorough study becomes urgently necessary
to break the myth of “higher pension”.
Aim of the
study:
The aim of the
study is to find out:
·
Will
someone actually get the higher pension
·
How
much will be the actual gain
·
How
the new pension system will work with different age group
·
Whether
the benefit will be more for those who earn more
Study design:
In each case, it
has been presumed that an employee is joining in employment at the age of 23
and retiring at 58 years, thereby completing 36 years in the employment. The
month of joining is January and the retirement is December of that year.
To understand about
the “actual salary” on which the pension will be calculated, a chart has been
prepared based on one of the service settlements for Medical Representatives in
a company (Table-I). The figures in column ‘G’ of Table-I is the “actual salary” as per the proposed pension system. Someone who joins in employment on
2019 and thereafter, shall be put on the salary slab as indicated in the ‘0’
year.
Table-I:
Payment per month for PF deduction (Wage)
|
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Years
|
Basic
|
Fixed
|
Variable
|
Special
|
Special
|
Salary
|
of
|
Pay
|
Dearness
|
Dearness
|
Pay
|
DA
|
for EPS calculation
|
Service
|
Scale
|
Allowance
|
Allowance
|
(B+C+D+E+F)
|
||
[A]
|
[B]
|
[C]
|
[D]
|
[E]
|
[F]
|
[G]
|
0
|
1300
|
29217
|
3087
|
770
|
720
|
35095
|
1
|
1495
|
29217
|
3087
|
770
|
720
|
35290
|
2
|
1690
|
29217
|
3087
|
770
|
720
|
35485
|
3
|
1885
|
29217
|
3087
|
770
|
720
|
35680
|
4
|
2110
|
29317
|
3087
|
855
|
810
|
36180
|
5
|
2335
|
29317
|
3087
|
855
|
810
|
36405
|
6
|
2560
|
29317
|
3087
|
855
|
810
|
36630
|
7
|
2830
|
29417
|
3087
|
1145
|
1050
|
37530
|
8
|
3100
|
29417
|
3087
|
1145
|
1050
|
37800
|
9
|
3370
|
29417
|
3087
|
1145
|
1050
|
38070
|
10
|
3710
|
31810
|
3430
|
1235
|
1140
|
41325
|
11
|
4050
|
31810
|
3430
|
1235
|
1140
|
41665
|
12
|
4390
|
31810
|
3430
|
1235
|
1140
|
42005
|
13
|
5300
|
31935
|
3430
|
1555
|
1470
|
43690
|
14
|
5755
|
31935
|
3430
|
1555
|
1470
|
44145
|
15
|
6210
|
31935
|
3430
|
1555
|
1470
|
44600
|
16
|
6820
|
32085
|
3430
|
1675
|
1600
|
45610
|
17
|
7430
|
32085
|
3430
|
1675
|
1600
|
46220
|
18
|
8040
|
32085
|
3430
|
1675
|
1600
|
46830
|
19
|
8815
|
33651
|
3772
|
2145
|
2080
|
50463
|
20
|
9590
|
33651
|
3772
|
2145
|
2080
|
51238
|
21
|
10365
|
33651
|
3772
|
2145
|
2080
|
52013
|
22
|
11345
|
33801
|
3772
|
2265
|
2210
|
53393
|
23
|
12325
|
33801
|
3772
|
2265
|
2210
|
54373
|
24
|
13305
|
33801
|
3772
|
2265
|
2210
|
55353
|
25
|
15725
|
33976
|
3772
|
2835
|
2810
|
59118
|
26
|
16935
|
33976
|
3772
|
2835
|
2810
|
60328
|
27
|
18145
|
33976
|
3772
|
2835
|
2810
|
61538
|
28
|
19625
|
34151
|
3772
|
2985
|
2985
|
63518
|
29
|
21105
|
34151
|
3772
|
2985
|
2985
|
64998
|
30
|
22585
|
34151
|
3772
|
2985
|
2985
|
66478
|
31
|
24385
|
34351
|
3772
|
3135
|
3160
|
68803
|
32
|
26185
|
34351
|
3772
|
3135
|
3160
|
70603
|
33
|
27985
|
34351
|
3772
|
3135
|
3160
|
72403
|
34
|
30135
|
34526
|
3772
|
3285
|
3335
|
75053
|
35
|
32285
|
34526
|
3772
|
3285
|
3335
|
77203
|
36
|
34435
|
34526
|
3772
|
3285
|
3335
|
79353
|
Case Study-1
Here, someone’s
joining year is 1985 and retirement in 2020. In 2019, this employee has entered
into the 35th year of his service and as per Table-I the full salary for
computing pension is Rs. 75,053. Let us take the help of Table-II to understand
the pension calculation.
Table-II:
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The above
employee joined EPS after 15 December, 1995 through Employees’ Pension Scheme
and his existing contribution in EPS till retirement is Rs. 215,668. This is
because the pensionable salary was considered as Rs. 6,500 per month during
1996 to 2014 and the maximum contribution in EPS was 8.33% of that pensionable
salary. Therefore, during the period, per month contribution to EPS was Rs. 542
which became Rs. 6,500per annum. Similarly, from 2014 till 2020 the pensionable
salary remains as Rs. 15,000 and the maximum limit for the contribution in EPS
per month is Rs. 1,250 (8.33% of Rs. 15,000) which results into Rs. 15,000 per
annum.
The formula of
pension before the Supreme Court’s order:
{(2014-1995)+1.1×pensionable
salary}÷70 + {(year of retirement-2014)+0.9×pensionable salary} ÷70
Considering the
pensionable salary as Rs. 6,500 and Rs. 15,000 in the corresponding period, the
pension per month in this case will be:
{(2014-1996) +1.1}
× Rs. 6500÷70 + {(2020-2014) +0.9} × Rs. 15000÷70 = Rs. 3,253
Hence, the
employee who is retiring in 2020, his pension will be Rs. 3,252 per month as
per the existing rule.
Following the
Supreme Court’s order, the new formula for calculating pension will be:
Pension per
month = Number of years of your service × Last drawn Basic salary ÷ 70
Accordingly, his
revised pension amount is:
36 × Rs. 77,203
÷ 70 = Rs. 39,704
The new pension
amount of Rs. 39,704 is 1120% higher than the existing one. It’s certainly
lucrative! But, how much will the employee have to contribute towards EPS if he
opts for the pension as per the proposed formula? For getting pension at the
new rate, it would be considered that the employee joined in the scheme in 1985
and started contributing since then at the rate of 8.33% per month of his full
salary. But, is it possible to find out the employees every month’s salary
since January-1985 for EPS calculation? In two years, 2019 and 2010, it is
shown that the employee will have to contribute an additional amount of Rs. 152,196
towards EPS. This additional amount will further increase with incremental
difference in Variable Dearness Allowance (VDA). However, the question in this
case is – how the additional amount will be calculated and transferred to the
EPS account since January-1985 if the employee opts to have new rate of
pension? Moreover, since the source of EPS fund is the employee’s EPF account,
it is also not very clear as to how the EPS account would be funded if the
employee doesn’t have sufficient EPF corpus. Can the partial benefit of new
pension proposals be extended to an interested employee if the transferable
amount in EPF is insufficient? There are more questions than answers.
Case Study-2
If someone is
joining in the year 2000 and shall retire in 2035 after completion of 36 years
in employment, then what could be the gain or loss as per the proposed pension
system? We understand that in this case, unlike the above employee who joined
in 1985, the salary details are available. In 2019, this employee enters into
the 20th year of employment and, according to the wage flow shown in Table-I,
his full salary for pension calculation is Rs. 51,238. Prior to that, he was on
different wage scale and, accordingly computed (Table-III). From 2019 onward till the retirement, the salary has been kept as per Table-I, assuming that
there will be no further variation due to either fresh wage settlement or
upward revision of VDA. Let’s see Table-III.
Table-III:
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This employee’s
contribution towards EPS remains as Rs. 414,668 till his retirement in the year
2035 and unless he joins the new EPS. Following the Supreme Court’s order, once
he joins EPS, he has to “contribute” a sum of Rs. 1,522,314 towards EPS from
the date of his joining in employment which is in excess by Rs. 1,107,646. This
additional amount, however, was to be kept in his EPF account. If so, then this
amount in EPF, with a compound interest of 8.65% per annum (as it is today),
will become Rs. 3,906,545 at the time of retirement. Please note that the rate
of interest in EPF was much higher in yesteryears which have not been
considered, otherwise; the EPF amount will be much higher.
Now, let’s see
the loss or gain of this employee as per the new pension order.
As per the
existing formula the employee’s pension will be:
(Pensionable
years of service + 2) × Rs. 15000 ÷ 70 = (36+2) × Rs. 15000 ÷ 70 = Rs. 8143
Following the
Supreme Court’s order, employee’s pension will be:
Pensionable
years of service × last drawn full salary ÷ 70 = 36 × Rs. 77203 ÷ 70 = Rs.
39,704
Thus, the new
pension is 401% higher than the existing one. But, to avail this additional
pension, the employee shall have to forgo a chunk of his EPF balance which, in
this case, is Rs. 3,906,545. If he keeps this money with the State Bank of
India (SBI) as fixed deposit for a period of 5-10 years, his earnings per month
will be Rs. 23,928 (considering the rate of interest as 7.35%).
So, his total
earning per month comes:
SBI FD + EPF
pension = Rs. 23,928 + Rs. 8143 = Rs. 32,071
Thus, the
employee is apparently getting an extra amount of Rs. 7,633 per month as
pension and will be benefitted by Rs. 91,596 per annum. However, the principal
amount of Rs. 3,906,545 which is employee’s own money will go to the government’s
exchequer; neither the employee nor the members of his family can ever access
that money. In short, for a gain of 91 thousand rupees per annum, the employee
has to write off a sum of 39 lakh rupees for ever.
Case Study-3
Now, let us take
the example of someone joining in the year 2015 and his retirement will be in
2050 (Table-IV). Considering the year 2019 as his 5th year of employment, his salary
will be Rs. 36,180 and, thereafter, the same will be followed till retirement
as per the wage chart of Table-I. Prior to that, he was on different wage
scale. No further variation in salary has been considered due to either fresh
wage settlement or upward revision of VDA.
Table-IV:
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In this case,
employee’s contribution towards EPS will be increased from Rs. 540,000 to Rs.
1,801,921 if the new system of pension is implemented. Therefore, he has to
make an additional contribution of Rs. 1,261,921. The same amount if kept in
EPF will fetch an amount of Rs. 6,046,579 at the age of retirement.
What shall be
the loss or gain in this case?
The employee’s
pension as per the existing norm will be:
(Pensionable
years of service + 2) × Rs. 15000 ÷ 70 = (36+2) × Rs. 15000 ÷ 70 = Rs. 8143
Following the
Supreme Court’s order, employee’s pension will be:
Pensionable
years of service × last drawn full salary ÷ 70 = 36 × Rs. 77203 ÷ 70 = Rs.
39,704
Does this hefty
rise of monthly pension by 401% lead to actual benefit after permanently parting
an amount of more than 60 lakh rupees? If this amount will be put in fixed
deposit, as per previous example, per month return will be Rs. 36,934.
Hence, monthly
earning will be:
SBI FD + EPF
pension = Rs. 36,934 + Rs.8,143 = Rs. 45,077
This will incur
a loss of Rs. 5,373 (Rs. 45,077 – Rs. 39,704) per month beside the permanent
loss of the principal amount of Rs. 6,046,579. This also shows that the younger
generation employees will incur more loss if the new pension system is adopted.
Additionally, more losses will be there in case of more salary.
Case Study-4
What will be the
scenario if someone joins in employment after 2019? Let us take the example of
an employee who will join in the year 2020 and whose retirement will be in 2055
after rendering 36 years of service (Table-V). His salary will be as per the
column ‘G’ of Table-I.
Table-V:
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This employee
will make an additional payment towards EPS which is as high as Rs. 1,276,407
and, on joining in the proposed EPS system, he has to cough off a colossal
amount from his EPF amounting Rs. 6,312,656. After retirement, these 63 lakh
rupees will not be in the employee’s account. Rather, the government will enjoy
the hard-earned money of a salaried employee.
Before making the loss / gain statement in this case,
let’s see the pension amount in case of pre and post Supreme Court verdict.
Pre-verdict
pension:
(Pensionable
years of service + 2) × Rs. 15000 ÷ 70 = (36+2) × Rs. 15000 ÷ 70 = Rs. 8143
Post-verdict
pension:
Pensionable
years of service × last drawn full salary ÷ 70 = 36 × Rs. 77203 ÷ 70 = Rs.
39,704
If Rs. 6,312,656
of the EPF is kept with the SBI, the interest per month will be Rs. 38,665.
Hence, monthly
earning will be:
SBI FD + EPF
pension = Rs. 38,665 + Rs.8,143 = Rs. 46,808
Hence, there will be a loss of Rs. 7,104 per month
beside the permanent loss of the principal amount of Rs. 6,312,656.
Discussions:
It is not very
clear as to how the Supreme Court’s verdict will be implemented in calculating
the pension for the employees who will be retiring in 2019 or within few years
from now. How their EPS account will be funded with additional amount is also a
big question.
As per the
existing norms, the government of India contributes in EPS at the rate of 1.16%
of the pensionable salary. Such amount was Rs. 69.60 per month when pensionable
salary was Rs. 6,500. At present the amount is Rs. 174.00 per month since the
pensionable salary is considered as Rs. 15,000. It is also not very clear
whether the government’s contribution towards EPS will be calculated based on
the “full salary” of the employee.
This study observed
that the proposed pension system will attribute to huge financial losses for all
employees, particularly the younger generation employees. For all cases, the
new pension system will take out a huge chunk of money from the employee’s EPF
account causing irreparable financial loss for the employees. Financial loss for
the new comers will be atrocious.
Conclusion:
The new pension
system prescribed by the apex court is having a little or no benefit for an
employee. The ruling has made the employees' financial losses as mandatory. The
order of the top court should, therefore, be reviewed to protect the interests
of the working people of India.
@pradipsinterpretations
