Pension scheme runs up Rs 19,000 cr deficit

Govt mulls hike in contribution from salary to 10.33%.

The Employees' Pension Scheme (EPS) covering 27.4 million members has run up a Rs 19,291 crore deficit, according to the latest valuation report for financial year 2002-03.

The report was commissioned by the Employees' Provident Fund Organisation (EPFO).

Though the EPFO has agreed to the repeated suggestions made by the valuers on modifications to the scheme, corrective measures are yet to be initiated.

The deficit represents an excess of the value of liabilities over the value of assets. Estimated at Rs 43 crore in 2000-01, the deficit rose to Rs 17,126 crore in 2001-02 due to an increase in the wage ceiling eligible for pension from Rs 5,000 to Rs 6,500 per month. Besides, a fall in the interest rates has reduced the income earned by the fund.

The change in the eligibility criteria alone is estimated to have caused a Rs 10,000 crore deficit, according to the report submitted by valuers KA Pandit to the government.

The EPS deficit is in addition to the Rs 927.15 crore hit the EPFO faces due to increase in interest rate on employees provident fund.

The EPS offers pension to separating employees and the amount is equivalent to 50 per cent of the last salary drawn. A total of 8.33 per cent of the employer's contribution to the provident fund is shifted to the pension fund.

According to the EPFO's own admission, the deficit is widening further but the numbers for 2003-04 are still being worked out by the valuers. The Pension Fund had a corpus of Rs 45,045 crore at the end of 2002-03 which rose Rs 52,743 crore at the end of 2003-04.

To check the trend, the valuers have asked the EPFO to either raise the rate of contribution from the present 8.33 per cent to 10.33 per cent or alternatively reduce the benefits.

The EPFO is more favourable to raising the contribution but this would require legal amendments. It, however, intends to wait until the next valuation report is received before going ahead with the changes.

The valuer has also suggested that the flexibility allowed to fund managers under the new Pension Fund Regulatory & Development Authority should also be extended to the EPS fund managers. The EPFO is, however, yet to decide on the matter and is contemplating appointing a consultant.

For the last three years, the valuers have also proposed an increase in the retirement age from 58 years to 60 years besides putting a check on withdrawals from the scheme.

They also recommended calculation of mortality rates besides ensuring proper actuarial calculation in the future for increasing the eligibility criteria.

The EPFO also agrees with the proposal to end the system of return of the pension corpus to the members. The scheme is virtually open-ended at present and allows members to opt for early pension on attaining 50 years of age.

An annual discounting factor of 3 per cent is applicable at present and the valuers want it to be doubled to 6 per cent.

How it could hurt

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• The EPFO may decide to pay pension at 60 years instead of 58 currently
• Those wanting to claim early pension may have to settle for a lower amount
• The formula for the return of capital may be reworked