Almost every EPF member who was part of the EPFO before Sep 1st 2014 has one or all these questions on their minds: Will I get higher EPS pension? Am I eligible for it if I am already retired? How much will my EPS pension increase? I can answer, the “am I eligible” question accurately (see circular below). I answered the “how much will it increase?” question last week and this week, let us consider a far more important question: Can the EPFO manage to pay the higher pensions? Let us first understand that it is not as simple as “the government will step in and make up the shortfall if any”.
Am I eligible for higher EPS pension if I am already retired?
This is plainly illogical. once you retire, you are no longer part of the EPS and will only get the pension you deserve – based on your past EPS contributions. The EPFO has made an interim decision that makes it quite clear: if you did not contribute more than Rs. 5000 or Rs. 6,500 a year (part of EPS 1995), there is no question of getting a revised EPS pension.
Don’t get your hopes up. The EPFO will be plumb crazy if they allow retirees to draw higher EPS pension in exchange for a lump sum after they have retired. The annuity rates on such an arrangement would be so high (~ 7-9%) that it may soon become bankrupt. So for their own sake, I hope they do not do it.
How much will my EPS pension increase?
There is another huge problem for the EPFO. Although an employee has to contribute to the EPS for the entirety of their service, the EPS pension is calculated only on the average 60 months contribution before retirement. This was a fantastic deal for the EPFO as they could dole out a petty pension for a lifelong contribution. Even if the monthly contribution is 8.33% of the full basic+DA, it is not a bad arrangement for them – the employee will contribute for a minimum of 10 years and a maximum of 35 years. So the last 5 year contributions used for EPS pension will not hurt the EPFO too bad. Why? Becuase although the EPS contributions are invested, they do not earn any interest to the employee. You can use this Revised EPS Pension Calculator to check the higher EPS pension and check how healthy that is wrt inflation.
Beware: The prospect of a higher pension is the same as the prospect of huge returns from Bitcoin. It has the potential to shut out practical problems and common sense.
So what is this huge problem? Anyone who is going to retire within the next few years (say 5 or less) can send an application through their employer and increase the EPS contribution to 8.33% of full basic + DA for the last few years only and still be eligible for the full higher EPS pension. This is a great deal for the employee and a terrible deal for the EPFO as the annuity rates on those pensions will be still quite high.
Yes, yes, you value a higher pension, but there must be an organisation around to give it in the first place! That is the subject of this post.
Can EPFO manage to pay Higher EPS Pension or will it go bust?
This post is inspired by this 2013 ETWealth report linked by a reader. First, let us consider some data and facts from the above linked EPFO annual report.
Crucial ruling 1: For accounts opened after 1st Sep 2014, if the salary is above the wage limit, there will be no EPS contributions. This is the first major push towards NPS for at least earning a higher income. Ref: pwc news
Crucial ruling 2: The increase from 6500 to 15000 of the wage ceiling. This lead to a significant increase in employer’s contributions to the EPS pension fund.
These two crucial rulings could well save the EPFO from going bust.
That is pretty healthy in terms of the EPFO’s ability to pay EPS higher pension. So what is the problem?
The employer’s pension scheme 1995 (EPS’ 95) requires an annual valuation of its pension fund by a valuer to ascertain its health which is the key to answering the above question. According to the EPFO annual report 2015-16 from which the following information has been sourced, M/s. K.A. Pandit, Consultants & Actuaries has been the valuer of the EPS fund from the 14th valuation in 2010 to the 19h valuation in 2015. EPFO received the 2015 report march 31st 2015 and submitted it to the government in end of June 2016. So you can understand the kind of information we are dealing with here and the speed at which things are processed.
These are the results of the 2015 Valuation.
The valuation first calculates the present value of future contributions (A)in the EPS pension fund (from what I gather assuming a rate of growth at 7%) and then calculates the present value of future EPS pension payouts (C) (from what I understand, assuming a rate of increase of 8%).
The corpus as on March 31st 2015 is shown above (B). So (A+B) -C results in a small surplus. This means the EPFO will barely make ends meet. This valuation has resulted in a deficit for several years in the past. The increased wage ceiling from 6500 to 15,000 has saved it.
This valuation does not consider the recent supreme court ruling. So here is an extremely conservative projection. Please, note that I am erring on the side of caution deliberately. If the EPFO can survive under these projections, then it is more than likely to survive under realistic projections (which as on date cannot be made).
What you see below for the first 4 years is actual data from FY 2011-12 to 2015-16. After are my projections.
Higher EPS Pension: Projected rate of growth
I am expecting the pensions to suddenly shoot to the roof for a couple years and then gradually decreasedue to requests for higher pensions from subscribers.
The EPS pension corpus will also increase for a few years and the decrease since higher EPS contributions need to be made to receive higher EPS pension.
Higher EPS Pension: Projected EPS Pension corpus and pension payouts
Here is the projection with real data for initial 5 years of the actual EPS corpus and total EPS payouts.
If you agree that the rates of growths assumed above are conservative enough -we can assume EPFO does not let retirees pay a lump sum in exchange for higher EPS pension – then, the EPFO will not go bust for at least 18 years or so.
Is this good news or bad news? I would say pretty good news. This is a simplistic projection and even if the EPFO is above to hold out without government bailouts for next decade, it would be a great achievement.
This is the reason two crucial rulings mentioned above are key. Today the EPFO is in better health because the wage ceiling was increased from Rs. 6500 to Rs. 15,000 (one could argue that is the reason for the increase). Since members who joined after 1st Sep 2014 are not part of EPS if their salary is above wage ceiling, that ensures that the liability for EPF will persist only until the current members die and 50% less liability until their spouses die. So my guess is that it would be okay – just about.
The EPFO ought to prevent retirees from getting the higher EPS pension in exchange for a lump sum. This is a terrible deal for the EPFO
They also need to revise the EPS pension formula. See the Revised EPS Pension Calculator: How much will my EPS Pension increase? for details. Currently is based on the past 60 months EPS contributions. So I could contribute only Rs. 1250 a month all my service and just in the last 5 years to retirement, hike up the contribution to 8.33% of full basic +DA and get the full higher EPS pension. They should revise it and impose at least 10 years minimum contribution at 8.33% at full salary. This will ensure their safety and health.
Remember: it is not all about us. We need the system to survive too.
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