Dear Senior Colleagues' Many of our senior colleagues have written or called me seeking clarifications on the order passed by the Supreme Court regarding the Employee Pension Scheme 95 on 4th Nov 2022.Since the issue has a long and 27 year history to it I shall divide my note into parts as Under
A. Background, B. Developments over the years' C. Impact of Today's order' D. What is the way forward' E. Miscellaneous issues'
A. Background.
1.EPS was started on 19th Nov 1995 with a view to provide a pension to all employees post the next month following the completion of 58 years.
2.The scheme involved deducting 8.33% of PF salary from the Employers Contribution to Pf
3.Accordingly the Employers Contribution of 12% was split into 2 parts 3.67% which was retained as employers contribution and 8.33% which was the EPS contribution.
4.In the Case of L&T we have an Exempt PF ie the PF contributions Employee and 3.67% of Employers contribution are managed by L&T PF trust and only the EPS contribution since Nov 1995 is given to the PF authorities.
5.As per the provisions of the EPS Scheme an employee at the completion of 58 years is entitled to receive a life long monthly pension.
6. The pension formula isNo of yrs completed since 1995/70
Eligible Salary.
For Example if someone retired in 2022. His formula would be
27/70 Eligible Salary.
The pension is Fixed Life long and does not change.
7.The scheme was highly unpopular as it
A. Did not return the corpus collected from the employee to his descendants after his death.
B. The spouse would receive only 50% of the eligible pension
C. Subsequent to the death of the employee and his spouse the children did not receive anything or the corpus back.
D. In the late 90s Interest rates on Risk free Investment gave 15% + returns.
8. Accordingly a lot of Employee Organisations and Unions (mainly Philips India) went to Court but their petitions to withdraw/make the scheme optional were rejected and the scheme was made compulsory.
9. The scheme had Fixed the Minimum Salary for Pension at Rs 5000 and accordingly Rs 417 was deducted and contributed for each employee.
10.THE SCHEME HAD AN OPTION AT THE CHOICE OF THE EMPLOYEE THROUGH HIS EMPLOYER TO CONTRIBUTE 8.33% ON HIS ENTIRE PF SALARY.
11.As the scheme was not popular for reasons mentioned in 7 above and alsobecause it was considered a forced contribution and lack of knowledge no employees/employers chose to deduct 8.33% on the actual PF salary.
B. Developments over the Years
1. The minimum Salary was raised to Rs 6500 and accordingly the monthly contribution moved up to Rs 541
2.The Minimum Salary was raised to Rs 15000 and the monthly contribution moved up to Rs 1250
3.Interest Rates started falling sharply from 15% to the present 7 to 8%.
4.Employees and some Trade Unions discovered that the contribution could be done on the entire PF salary and not on the Minimum salary and started approaching the Courts that their employee's be allowed to contribute on the full PF salary and not merely the minimum amount of salary of Rs 15000.
5.Courts in a few states ruled that employees that employees had a right to contribute on their full PF salaries and from September 2014 PF authorities allowed entities who were not exempt to contribute.
6.In 2018 the Kerala High Court gave a judgement that Employees from all organisations could contribute wef Nov 1995 on the full PF salary and along with interest at 6%give a lumpsum contribution to the PF authorities and receive pension as per the formula on the full last drawn PF salary. This included employees who had retired after 2014.
7.PF authorities went in appeal against various State High Court Orders saying in their defence that the above could not be applied to Exempt PF Funds where they did not get the corpus on the Full PF salary.
8.All the Appeals were combined into 1 common appeal and the matter was transferred to the Supreme Court.
C. Judgement of 4th Nov 2022
1. The Honorable Supreme Court has ruled that any employee who has retired after 1st Sep 2014 is eligible to receive pension on the full salary.
2. This will include employees of Exempt PF Trusts like L&T
3. It has given the PF authorities 6 months prior period to enable it to find ways and means to raise funds to execute the order.
D. Way Forward
1.Employee will have an option to contribute as a lumpsum his differential contribution as
8.33 % of Actual Monthly Salary- 8.33% of Rs 5000/Rs 6500/Rs 15000 what he has actually Contributed.
2.This will have to be worked out on a Monthly Basis for Each month from Nov 1997 to the month he reached 58 Years.
3.The employer will have to certify and confirm that amount.
4.6% interest to be added to that amount.
5.Pension will be paid on
No of Yrs/70 Last Drawn Salary
6.Pension will be Payable from the Next month after the age if 58.
7.The total backlog contribution to be made to EPFO can be set off by the total differential pension receivable and net amount Paid to EPFO
8 Joint Application made to the PF authorities by employee and certified by employer.
E. PRACTICAL ISSUES
1.EPS scheme is already hugely underfunded.
2.EPS scheme is highly inefficient and non digital.
3.Whether PF authorities will accept employer Certification of 20 year + salary is a big question mark.
4.Whether Company would have data of month wise salary since 1997 is a big question mark. PF annual data will be available but may not be acceptable to PF authorities.
5.For Retired employees it would mean taking money out from their existing investments and an opportunity loss of interest.
6.The Rough back of the envelope calculations I had done suggest a Break Even period of 12 to 14 years ie Age 70 to 72.
Higher the basic salary quicker the break even.
7.MOST IMPORTANT PLEASE APPRECIATE THAT YOU DO NOT GET YOUR CAPITAL BACK.ASSUME YOUR CAPITAL IS 100 IF YOU ASSUME A LIFE EXPECTANCY OF 20 YEARS POST RETIREMENT YOU NEED 100/20=5% DIFFERENTIAL INTEREST TO BREAK EVEN YOUR EXISTING RISK FREE INVESTMENT EARNS 7%ACCORDING MIN RETURN FROM THE PENSION AMT CALCULATED AS PENSION/CORPUS SHOULD BE 12% MIN
This has been a complicated topic which I am sure has raised more questions than answers. Happy to try to resolve your queries any time after 6 PM tomorrow or on Sunday.
Email at
Balsararamyar@gmail.com
Warm Regards
Done by my friend. Such a simple explanation I have never read
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