The government has decided to stop premature lumpsum withdrawals of pension with a view to trimming the growing deficit burden of the decade-old Employees Pension Scheme (EPS). The EPS is likely to shed its deficit of approximately Rs 40,000 crore through a series of moves to restrict withdrawals. The measures are being notified by the labour ministry, the Employment Provident Fund Organisation said.
The urgency for the labour ministry to go for these measures follows its recent expansion of the EPF coverage to include companies with less than 20 workers. The expansion of coverage is expected to worsen the deficit further .
EPFO chairman A Vishwanathan said that it was true that deficits would be tackled by the restriction on withdrawals, but the move should be seen as a social security measure more than anything else as it was meant to ensure proper pension for all.
He said that taking pension funds in advance or commutation was essentially a European concept and should not apply here. In Europe, the provident fund and gratuity are not there and the monthly pension is what is available. “Therefore, people are allowed to withdraw in bulk for their needs of lumpsum cash,” he said.
However, in India, PF and gratuity provide money for bulk cash needs and hence pension should not be touched. Commutation reduces the future value of pension. “Why should workers be allowed to reduce the pension they are entitled to?” he asked.
Under the new measures to stop pension withdrawals, any withdrawal would be accompanied by a drastic 4 per cent cut in the amount given in premature withdrawals.
From this measure alone the pension scheme is expected to save Rs 20,000 crore, which will help it cover much of its deficit.
The second measure would be a reduction in interest rates on withdrawals. The interest given on premature withdrawals would go down drastically from 10 per cent to 6 per cent. This would fetch the scheme another Rs 20,000 crore, according to Vishwanathan.
The scheme had a deficit of Rs 22,000 crore when it was last calculated in 2004, the EPFO said. A valuation is being done for the following years with the appointment of an actuary, officials said.
The measure to cut interest rates in premature withdrawals had cut deficits by Rs 12,000 crore.
