The Employees Provident Fund Organization (EPFO) can extend the coverage of its pension scheme to include all workers, belonging to the organized and unorganized sectors, regardless of their monthly income. It is proposed that the new scheme will be based on an individual contribution and ensure that each worker receives a minimum pension of Rs 3,000 per month after reaching the age of 60.
The proposed scheme, likely to be called Universal Pension Scheme (UPS), aims to address various challenges which the Employees Pension Scheme (EPS) existing in 1995 suffers from, notably, no coverage for employees earning more than Rs 15,000 per months, a paltry pension amount for existing subscribers, and coverage for the section left behind within the organized, unorganized/independent workforce.
The new scheme would provide for a retirement pension, a widow’s pension, a child’s pension and a disability pension. However, it would bring the minimum length of service giving right to a pension to 15 years, compared to 10 today. UPS will pay a family pension if a member dies before age 60.
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“The minimum accumulation of approx. Rs 5.4 lakh is required for a minimum of Rs 3,000 pension per month. Members can choose to contribute more voluntarily and accumulate a significantly larger amount for a higher pension” said an ad hoc committee, set up by the Central Board of Trustees (CBT), EPFO’s highest decision-making body.
Currently, the EPF contribution is compulsory for workers earning up to Rs 15,000 per month in establishments with more than 20 workers. Each employee contributes 12% of their base salary to the EPF scheme. This is compensated by the employer.
The EPS is compulsory for all contributors to the EPF. Of the employers’ contribution, 8.33% is deposited into the pension scheme subject to a cap of Rs 1,250 per month based on the salary cap of Rs 15,000 per month. The amount is paid into a pension fund without earning interest for the subscriber. After retirement, the pension is paid, on a monthly basis, according to a fixed formula for all.
Under the proposed new scheme, workers in the organized sector will contribute to the scheme according to a certain percentage of wages (so that when wages increase, the contribution to the fund increases). Workers in the unorganized sector will have to contribute a fixed amount with the possibility of making voluntary payments. The plan will not create any contingent liabilities for the government in the future.
Subject to the approval of the committee’s suggestions, the new scheme may also suggest increasing the wage cap up to Rs 15,000 per month now, but “employers’ liability should be limited to maximum contributions @wage Rs 25 000 or the revised salary cap amount.”
The new regime will also make the interface easy and transparent to move from formal to informal employment.
“The final pension depends on the income of the fund during the accumulation phase. The committee discussed that since pension funds would be locked in for the long term, a slightly different investment strategy would be required than what is followed for a provident fund where the investment horizon is much shorter,” EPFO said.