EPFO Subscribers May Face Curbs On Early Pension Withdrawal—BQ Exclusive

The proposed scheme will also lead to creation of individual pension accounts on which interest will be earned annually.

An investor uses a calculator at a brokerage. (Photographer: Maurice Tsai/Bloomberg News)

The Employees’ Provident Fund Organisation has proposed curbs on early withdrawal of pension contribution by formal sector workers as part of a new scheme that will be notified under the labour codes. The scheme, aimed at higher level of monthly pension post retirement for workers, will also lead to creation of individual pension accounts for the newly employed.

“It is proposed that the new pension schemes to be framed under the Social Security Code, members may be allowed to withdraw benefit from pension schemes only after two continuous years of exit from employment,” according to documents reviewed by BloombergQuint.

At present, withdrawal of contribution from the Employees’ Pension Scheme, administered by the EPFO, can be done after two months of exiting from a job.

The EPFO’s central board of trustees, led by Labour and Employment Minister Santosh Kumar Gangwar, will meet on Thursday to take up the proposed pension scheme.

“Due to frequent withdrawals, a member superannuates with lesser pensionable service and consequently gets lower pension. Without such withdrawals, members would get far higher pension,” the agenda document of the meeting stated.

The average age of the pension scheme members is 38 years, which the EPFO said, points to the fact that “majority of members joining at an early age withdraw from the scheme when they change employment.”

The move to curb withdrawal of pension sum could also lead to the build-up of a bigger corpus in the pension fund, which is running into losses. The EPFO’s pension account had a net actuarial deficit of Rs 37,327 crore as of March 31, 2019, according to the documents cited above.

In addition, those who become members of the EPFO schemes will get an individual pension account towards which they will be able to make voluntary contributions as well. The formal sector workers will earn interest on their pension sums, just as they do on the provident fund savings under the EPFO.

Existing System

Formal sector workers contribute 12% of their wage (basic pay and DA) towards the EPFO schemes with a matching contribution from employers. Of this, 8.33% of the employers’ share goes towards the pension scheme.

However, subscribers receive a fixed pension which is based on a formula, irrespective of the contribution made from wages during their employment tenure. The average pension received by an individual was just Rs 1,438 per month during 2019‐20 due to the existing framework.

This is because the EPS fund is a pooled account wherein the monthly contributions of all members are pooled together into a single account. All those who have completed at least 10 years of service receive monthly pension after attaining the age of 58 years.

This system of pooling the pension contribution and allowing early withdrawal of pension has made the EPFO’s pension fund highly unsustainable.

New Framework

The pension scheme will be grouped into three categories:

  • Existing members.
  • New members, with a monthly income of up to Rs 15,000, who join after the social security code comes into force.
  • Members, under the new labour laws, with a monthly income higher than Rs 15,000.

For existing members of the pension scheme, the only change would be a curb on withdrawal of pension. For new members, pension will be accumulated annually based on a new formula. The members will be able to customise the contribution towards the pension scheme.

The member may either choose for lower pension in the beginning which increases over time, or the member may opt for relatively stable pension over a long period of time
New Proposed Pension Scheme

The members of the pension scheme can review their contribution every three years.

Members will also have an option to contribute towards the pension scheme even when they are not employed. The new provisions will encourage members to save more in their individual pension accounts by depositing contributions at higher rates.

Those earning below Rs 15,000 will be covered under the pension scheme compulsorily and will receive minimum monthly pension as notified by the Central government. The pension scheme will be voluntary for those earning above this income threshold; however, such members will not be eligible for minimum monthly pension.

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