Supreme Court's Pension Verdict Impinged Workers

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)
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:

DOJ Age Wage  Existing Additional 1-Jan-85 as on for EPS EPS Dec. EPF Contribution Contribution [A] [B] [C] [D] [E] 1985 23 NA 0 NA 1986 24 NA 0 NA 1987 25 NA 0 NA 1988 26 NA 0 NA 1989 27 NA 0 NA 1990 28 NA 0 NA 1991 29 NA 0 NA 1992 30 NA 0 NA 1993 31 NA 0 NA 1994 32 NA 0 NA 1995 33 NA 0 NA 1996 34 NA 6500 NA 1997 35 NA 6500 NA 1998 36 NA 6500 NA 1999 37 NA 6500 NA 2000 38 NA 6500 NA 2001 39 NA 6500 NA 2002 40 NA 6500 NA 2003 41 NA 6500 NA 2004 42 NA 6504 NA 2005 43 NA 6504 NA 2006 44 NA 6504 NA 2007 45 NA 6504 NA 2008 46 NA 6504 NA 2009 47 NA 6504 NA 2010 48 NA 6504 NA 2011 49 NA 6504 NA 2012 50 NA 6504 NA 2013 51 NA 6504 NA 2014 52 NA 8628 NA 2015 53 NA 15000 NA 2016 54 NA 15000 NA 2017 55 NA 15000 NA 2018 56 NA 15000 NA 2019 57 75053 15000 75023 2020 58 77203 15000 77173 Sum Total at retirement 215668 152196

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:

DOJ Age Wage Existing New Differential If money 1-Jan as on for EPS EPS Amount in was kept 2000 Dec. EPF Contribution Contribution EPS in EPF per month per annum per annum per annum [A] [B] [C] [D] [E] [F] [G] 2000 23 8740 6500 8737 2237 2430 2001 24 9200 6500 9196 2696 5570 2002 25 9900 6500 9896 3396 9741 2003 26 11100 6500 11096 4596 15577 2004 27 12500 6504 12495 5991 23434 2005 28 14300 6504 14294 7790 33925 2006 29 16000 6504 15994 9490 47170 2007 30 17700 6504 17693 11189 63407 2008 31 18700 6504 18693 12189 82134 2009 32 20100 6504 20092 13588 104002 2010 33 22600 6504 22591 16087 130477 2011 34 24200 6504 24190 17686 160979 2012 35 25400 6504 25390 18886 195423 2013 36 27100 6504 27089 20585 234693 2014 37 28700 8628 28689 20061 276790 2015 38 44600 15000 44582 29582 332873 2016 39 45610 15000 45592 30592 394905 2017 40 46220 15000 46201 31201 462964 2018 41 46830 15000 46811 31811 537574 2019 42 50463 15000 50443 35443 622583 2020 43 51238 15000 51218 36218 715787 2021 44 52013 15000 51993 36993 817895 2022 45 53393 15000 53372 38372 930334 2023 46 54373 15000 54352 39352 1053564 2024 47 55353 15000 55331 40331 1188517 2025 48 59118 15000 59095 44095 1339233 2026 49 60328 15000 60304 45304 1504299 2027 50 61538 15000 61514 46514 1684958 2028 51 63518 15000 63493 48493 1883395 2029 52 64998 15000 64972 49972 2100604 2030 53 66478 15000 66452 51452 2338208 2031 54 68803 15000 68776 53776 2598891 2032 55 70603 15000 70575 55575 2884077 2033 56 72403 15000 72374 57374 3195887 2034 57 75053 15000 75023 60023 3537547 2035 58 77203 15000 77173 62173 3911095 Sum Total at retirement 414668 1505781 1091113 3906545

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:

DOJ Age Wage Existing New Differential If money 1-Jan as on for EPS EPS Amount in was kept 2015 Dec. EPF Contribution Contribution EPS in EPF per month per annum per annum per annum [A] [B] [C] [D] [E] [F] [G] 2015 23 29217 15000 29205 14205 15434 2016 24 30730 15000 30718 15718 33846 2017 25 32580 15000 32567 17567 55861 2018 26 34530 15000 34516 19516 81897 2019 27 36180 15000 36165 21165 111977 2020 28 36405 15000 36390 21390 144903 2021 29 36630 15000 36615 21615 180922 2022 30 37530 15000 37515 22515 221034 2023 31 37800 15000 37784 22784 264909 2024 32 38070 15000 38054 23054 312872 2025 33 41325 15000 41308 26308 368519 2026 34 41665 15000 41648 26648 429350 2027 35 42005 15000 41988 26988 495811 2028 36 43690 15000 43672 28672 569851 2029 37 44145 15000 44127 29127 650790 2030 38 44600 15000 44582 29582 739224 2031 39 45610 15000 45592 30592 836405 2032 40 46220 15000 46201 31201 942655 2033 41 46830 15000 46811 31811 1058757 2034 42 50463 15000 50443 35443 1188849 2035 43 51238 15000 51218 36218 1331035 2036 44 52013 15000 51993 36993 1486362 2037 45 53393 15000 53372 38372 1656624 2038 46 54373 15000 54352 39352 1842677 2039 47 55353 15000 55331 40331 2045889 2040 48 59118 15000 59095 44095 2270767 2041 49 60328 15000 60304 45304 2516411 2042 50 61538 15000 61514 46514 2784618 2043 51 63518 15000 63493 48493 3078175 2044 52 64998 15000 64972 49972 3398733 2045 53 66478 15000 66452 51452 3748625 2046 54 68803 15000 68776 53776 4131309 2047 55 70603 15000 70575 55575 4549050 2048 56 72403 15000 72374 57374 5004880 2049 57 75053 15000 75023 60023 5503017 2050 58 77203 15000 77173 62173 6046579 Sum Total at retirement 540000 1801921 1261921 6046579

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:

DOJ Age Wage Existing New Differential If money 1-Jan as on for EPS EPS Amount in was kept 2020 Dec. EPF Contribution Contribution EPS in EPF per month per annum per annum per annum [A] [B] [C] [D] [E] [F] [G] 2020 23 35095 15000 35081 20081 21818 2021 24 35290 15000 35275 20275 45734 2022 25 35485 15000 35470 20470 71931 2023 26 35680 15000 35665 20665 100606 2024 27 36180 15000 36165 21165 132304 2025 28 36405 15000 36390 21390 166989 2026 29 36630 15000 36615 21615 204918 2027 30 37530 15000 37515 22515 247106 2028 31 37800 15000 37784 22784 293236 2029 32 38070 15000 38054 23054 343649 2030 33 41325 15000 41308 26308 401959 2031 34 41665 15000 41648 26648 465682 2032 35 42005 15000 41988 26988 535286 2033 36 43690 15000 43672 28672 612741 2034 37 44145 15000 44127 29127 697390 2035 38 44600 15000 44582 29582 789855 2036 39 45610 15000 45592 30592 891415 2037 40 46220 15000 46201 31201 1002423 2038 41 46830 15000 46811 31811 1123696 2039 42 50463 15000 50443 35443 1259404 2040 43 51238 15000 51218 36218 1407694 2041 44 52013 15000 51993 36993 1569652 2042 45 53393 15000 53372 38372 1747118 2043 46 54373 15000 54352 39352 1940999 2044 47 55353 15000 55331 40331 2152715 2045 48 59118 15000 59095 44095 2386834 2046 49 60328 15000 60304 45304 2642518 2047 50 61538 15000 61514 46514 2921633 2048 51 63518 15000 63493 48493 3227042 2049 52 64998 15000 64972 49972 3560477 2050 53 66478 15000 66452 51452 3924360 2051 54 68803 15000 68776 53776 4322245 2052 55 70603 15000 70575 55575 4756502 2053 56 72403 15000 72374 57374 5230276 2054 57 75053 15000 75023 60023 5747911 2055 58 77203 15000 77173 62173 6312656 Sum Total at retirement 540000 1816407 1276407 6312656

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. 

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