 "Employees' Pension Scheme deficits much lower than thought")
The estimated deficit in the Employees’ Pension Scheme has declined from Rs 54,203 crore to Rs 10,000 crore between the issue of the previous actuarial report (2009) and the latest one.
Sources in the labour ministry said the latest report was yet to be finalised and the steep reduction was due to to a change in the data, as well as in the approach to the data.
The previous actuarial report had complained it was handicapped by paucity of data. Last year, Employees’ Provident Fund Organisation staff had admitted the organisation didn’t have any information of the ages of 95 per cent of its subscribers. To get a more accurate idea of its pension liabilities, it made a fresh effort to secure the birth records of all account holders.
The latest actuarial report was based on the revised data, sources said.
The second reason for the decline in the deficit is that the previous actuarial report had erred in looking at all subscribers of the pension scheme, while only those who had completed 10 years of service were eligible for pensions. This is a key feature of the EPS but was not taken into account by the actuary. Most subscribers withdraw from the scheme much before completion of 10 years, say sources.
The latest report has rectified this and looked at the liabilities specifically pertaining to those who have completed at least 10 years of service. A third reason for the sudden fall in the deficit in the pension scheme is adoption of a World Bank-approved evaluation methodology called PROST or Pension Reform Options Simulation Toolkit. The main difference between the analysis given by using PROST and that of the actuarial valuation normally followed is that the formerl gives an analysis of cash flow considering ongoing scheme.
Whereas the actuarial valuation gives the present value of the income and expenses and the net requirement, considering the members data as on the date of valuation.
KA Pandit, the company which did the current valuation, was part of a training programme in the technique conducted at the behest of the finance and labour ministries at the World Bank.
In the preliminary evaluation done in consultation with the World Bank earlier, the shortfall in pension funds in 2009 was found to be Rs 11,092 crore. The shortfall in the actuarial evaluation at that time was Rs 54,203 crore.
The ministry of labour says the latest actuarial report is also going to be affected by changes in the terms and conditions for the review. For instance, the actuary has been asked to do a sensitivity analysis of the fund based on returns ranging from eight to nine per cent. The fund available has so far been calculated on the basis of an average return of eight per cent a year, thought the returns have often crossed that often. The calculation was also said to be distorted because it was based on salary drawn in the final year of service, which often does not tally with contributions made by the member in his or her lifetime.
The other factor that distorts calculation of assets is the pensionable period. Currently, a member getting a pension for 25 years of service is given a bonus of two years, thus burdening the fund. The actuary had been asked to go into these anomalies. The three corrections, if made, were estimated to save the fund close to Rs 38,000 crore. The actuary is expected to make recommendations on these.
Sources in EPFO said that cuts in benefits are likely to be recommended and so are the contributions likely to go up, to make the fund viable.
Sources in the labour ministry said the latest report was yet to be finalised and the steep reduction was due to to a change in the data, as well as in the approach to the data.
The previous actuarial report had complained it was handicapped by paucity of data. Last year, Employees’ Provident Fund Organisation staff had admitted the organisation didn’t have any information of the ages of 95 per cent of its subscribers. To get a more accurate idea of its pension liabilities, it made a fresh effort to secure the birth records of all account holders.
The latest actuarial report was based on the revised data, sources said.
The second reason for the decline in the deficit is that the previous actuarial report had erred in looking at all subscribers of the pension scheme, while only those who had completed 10 years of service were eligible for pensions. This is a key feature of the EPS but was not taken into account by the actuary. Most subscribers withdraw from the scheme much before completion of 10 years, say sources.
The latest report has rectified this and looked at the liabilities specifically pertaining to those who have completed at least 10 years of service. A third reason for the sudden fall in the deficit in the pension scheme is adoption of a World Bank-approved evaluation methodology called PROST or Pension Reform Options Simulation Toolkit. The main difference between the analysis given by using PROST and that of the actuarial valuation normally followed is that the formerl gives an analysis of cash flow considering ongoing scheme.
Whereas the actuarial valuation gives the present value of the income and expenses and the net requirement, considering the members data as on the date of valuation.
KA Pandit, the company which did the current valuation, was part of a training programme in the technique conducted at the behest of the finance and labour ministries at the World Bank.
In the preliminary evaluation done in consultation with the World Bank earlier, the shortfall in pension funds in 2009 was found to be Rs 11,092 crore. The shortfall in the actuarial evaluation at that time was Rs 54,203 crore.
The ministry of labour says the latest actuarial report is also going to be affected by changes in the terms and conditions for the review. For instance, the actuary has been asked to do a sensitivity analysis of the fund based on returns ranging from eight to nine per cent. The fund available has so far been calculated on the basis of an average return of eight per cent a year, thought the returns have often crossed that often. The calculation was also said to be distorted because it was based on salary drawn in the final year of service, which often does not tally with contributions made by the member in his or her lifetime.
The other factor that distorts calculation of assets is the pensionable period. Currently, a member getting a pension for 25 years of service is given a bonus of two years, thus burdening the fund. The actuary had been asked to go into these anomalies. The three corrections, if made, were estimated to save the fund close to Rs 38,000 crore. The actuary is expected to make recommendations on these.
Sources in EPFO said that cuts in benefits are likely to be recommended and so are the contributions likely to go up, to make the fund viable.
| Employees Pension Scheme shortfalls dip |
| Employees Pension Scheme investment corpus: Rs 1,61,780 crore |
| Pensioners: 4.1 million |
| Annual contribution from members: Rs 14,767 crore |
| Annual payout: Rs 7,000 crore |
| Pension fund deficit: Rs 10,855 crore (subject to further revision) |