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Why structural flaws can make the EPS go bust

Posted on September 30 2020


Till 2 years ago, there were very few salaried people who were covered by the EPFO had heard of the Employees' Pension Scheme (EPS). Only 1 out of 5 respondents to an online survey conducted in August 2013, knowing that they were qualified for lifelong pension under the scheme. But after the contribution was hiked in 2014 from Rs 541 per month to Rs 1,250 and the cap on the monthly pension was raised to Rs 7,500, the subscribers are looking at the scheme more seriously. 
Although the changes, the EPS still suffers from the structural faults which it always had. The contributions from the subscribers flow into a pool and monthly pensions are paid out of that. The benefit of per month is capped at Rs 7,500. Here lays the problem. Even at a steady 8.5% return, a contribution of Rs 1,250 per month for the age group of 25-30 years will grow to a sum that can yield a considerably higher monthly income.
Trade union representative in the Central Board of Trustees secure the EPS. A.D. Nagpal, Secretary of the Hind Mazdoor Sabha, points out the EPS is the only scheme that gives out pension to widows and orphans in case the breadwinner dies.

The bigger problem is that the EPS is on its way of becoming bankrupt. Actuarial studies of the projected income and liabilities said that the scheme will run into a loss. In 2009, this loss was predicted at Rs 61,600 crore but consequent the studies based on the actual data have given a lower figure. The last actuarial study in 2014 put the loss at Rs 9,916 crore, though a newer study has reduced the prediction further.

The Labour Sectary Shankar Aggarwal said that the EPS miseries are rooted in the demographic directions. As the country's population turns older day by day and more people join the ranks of retirees, the outflows from the scheme will rise rapidly than the inflows into the scheme. This is already visible from the rise in the outflows as a percentage of the corpus. The change in the demographics is a universal problem. We are looking at suitable solutions.

The pressure on the EPS will increase with the minimum pension hiked to Rs 1,000 and the cap on the maximum payout rose to Rs 7,500. The hike in the contribution can ease it a bit but the long-term picture which looks cleared. By the time millennial retires; the scheme may have already gone front.

If any member starts putting Rs 1,250 in the EPS every month at 25, when he becomes 58 then he will get a monthly pension of Rs 7,500. If the same amount was put in the EPF and earns 8.5% then it would have grown to Rs 25 lakh in 33 years. At the usual annuity rate, he will receive a monthly pension of Rs 15,250 for life. 
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