Good news! EPFO subscribers pensions may rise 10 times, but there’s a big catch

The Supreme Court ruling over hike in pension may benefit crores of private sector employees, but only if EPFO agrees to it. In fact, the apex court in a case filed by a private sector employee had ruled in 2016 that pension of the filing parties under EPF should be revised as per the amendment done in 1996 by EPFO.
“As per this amendment, EPFO members were allowed to raise pension contribution to 8.33% of full salary (basic + DA) irrespective of what the salary was. However, EPFO didn’t implement this even when the private sector employers approached it, and said that response from the concerned parties should have arrived within six months of the said amendment. Then 12 private sector employees approached the Supreme Court and the court directed EPFO to change their pension scheme as per the amendment,” says Jitendra P S Solanki, MCSI, CTEP, CFP and Financial Planner for Special Needs Dependent Families.
Thankfully, the court ruling has already resulted in a windfall for some of the pensioners as their pension has increased by more than 10 times. The question, however, is: What will be the impact of the SC ruling and will it benefit all the private sector employees? However, let us first take a look at EPS, EPF and what salaried people are entitled to.
What is EPS (Employee Pension Scheme 1995)?
Out of the total contribution of 12% of pay being made by the employer, 8.33% is mandatorily diverted to an Employee Pension Scheme (EPS). The balance of 3.67% of employer contribution along with 12% of employee contribution is remitted to the Provident Fund (EPF). “Pay for the purpose of pension is restricted to the statutory wage ceiling notified under the Provident Fund Act, which currently is Rs 15000 pm. Effective from 1 September 2014, when the wage ceiling was enhanced to Rs 15000 pm from the erstwhile Rs 6500 pm, the notification also provided that in respect of new joinees, contributions to Pension Scheme is mandatory only where the employee has a “Pay” of less than Rs 15000 pm,” says Saraswathi Kasturirangan, Partner, Deloitte India.
At a very high level, the employee is entitled to a monthly pension on retirement computed based on the below formula:
Monthly Member’s pension = (Pensionable salary X Pensionable service) / 70
For the above purpose, pensionable salary has been restricted to the applicable wage ceiling since contributions are restricted to wage ceiling. The EPS is, therefore, a defined benefit scheme.
What is the difference between EPS and EPF?
Provident Fund, on the other hand, is a defined contribution scheme governed by the Employees Provident Fund Act 1952 (EPF) whereby the employer and employee contribution as discussed above is accumulated to an individual account along with applicable interest, and can be withdrawn as a lump sum upon retirement. Withdrawal other than on retirement is also permitted under specified circumstances.
What salaried people contribute and are entitled to
The provisions of PF and the EPS Act are mandatorily applicable where the Pay for the purposes of an employee does not exceed the wage ceiling at the point of initial membership. “Where the pay exceeds the wage ceiling, the employee has an option to become a member. Such employees who are members are entitled to both pension benefits as well as Provident Fund benefits as elaborated above,” informs Kasturirangan.
What the SC Judgement means for salaried people
The Pension scheme restricts the pay for the purpose of pension contribution to the wage ceiling. This means that the quantum of pension is limited as well. “Salaried employees may prefer to contribute a higher amount so that they are able to receive a higher pension. Basis the Supreme Court decision, if employees are permitted to contribute on higher pay, they may choose to divert their contribution made to the Provident Fund to pension fund and earn higher pensions, instead of having higher PF withdrawals,” says Kasturirangan.
Solanki further explains, “This ruling will benefit the employees who joined an organisation before September 2014 since post-2014 EPFO has capped the salary at Rs 15000 pm for the EPS benefit. After this case, it is expected that more employees will approach EPFO to increase their pension as per the amendment. Although EPFO has rejected such requests in the past stating that they should have approached it within six months of the said amendment, however, the Supreme Court in its ruling has said such restrictions cannot apply. As a result, employees will benefit with a massive rise in pension.”
However, in case this happens, EPFO is surely going to be burdened with a huge liability which it has to fulfill now. EPFO has already started thinking about barring exempted PF Trusts, i.e. privately-managed trusts, from the EPS benefit. So, we should expect more court cases in the future if EPFO goes against the SC ruling or a delay in the implementation of the ruling to other employees who are part of the exempt establishments.