Pension Scheme: The Employees’ Provident Fund Organization (EPFO) is currently exploring the possibility of modifying the current formula used to determine monthly pension amounts.
According to the proposed change, the monthly pension would be calculated based on the average pensionable salary received throughout the individual’s entire pensionable service. However, the final decision on this matter will be made after carefully assessing the report from the ‘Actuary’, who will evaluate the pension, its payment amount, and associated risks. This information was shared by a reliable source involved in the matter.
EPFO Employees Pension Scheme
Currently, the Employees’ Provident Fund Organization (EPFO) calculates monthly pensions under the Employees’ Pension Scheme (EPS-95) using a formula that multiplies the pensionable salary (average salary of the last 60 months) by the pensionable service, divided by 70. However, there is a proposal to modify this formula by including the average pensionable salary received throughout the pensionable service, rather than just the last 60 months.
It is important to note that this proposal is still in the early stages, and no final decision has been made yet. The EPFO will make a final determination after reviewing the report provided by the ‘Actuary’. If the formula for pension calculation is changed, it will affect the monthly pension amounts for all individuals, including those who choose higher pension options based on the current formula. This could potentially reduce the level of competition for higher pensions. Let’s understand this with an example.
Consider an individual who opts for a higher pension and has an average salary of Rs. 80,000 over the last 60 months. They have a pensionable service of 32 years. Under the existing formula (80,000 multiplied by 32 divided by 70), their monthly pension would be Rs. 36,571. However, if the average salary is considered over the entire pensionable service, the monthly pension amount would be lower because the initial days of employment usually have lower salaries (basic salary and dearness allowance).
Opportunity for Increased Pension
It is important to note that in November of last year, the Supreme Court instructed the government to allow subscribers four months to choose a higher pension. To facilitate this, the EPFO has introduced an online platform where subscribers can fill out a joint option form with their employers to opt for a higher pension. The initial deadline for this was May 3, 2023, but it has now been extended to June 26, 2023.
Currently, EPFO subscribers contribute to their pensions based on a fixed limit of Rs. 15,000 per month, even if their actual salary exceeds this amount. However, with the option for a higher pension, they will have the opportunity to receive a greater monthly pension amount. Employees contribute 12 percent of their salary to EPFO’s social security scheme, while out of the employer’s 12 percent contribution, 8.33 percent is allocated to the Employees’ Pension Scheme (EPS). The remaining 3.67 percent is directed towards the Employees’ Provident Fund.
The government provides a subsidy of 1.16 percent to the Employees’ Pension Scheme based on a basic salary limit of Rs. 15,000. When questioned about the need to change the pension formula, a source explained, “The concern is that providing higher pensions over a long period of time could create financial burden. That’s why a new formula is being considered.” In response to inquiries about the Rs. 6.89 lakh crore fund in the Pension Fund, the source clarified that this money doesn’t solely belong to pensioners but also includes shareholders associated with the EPFO and the employees. The Employee Provident Fund Organization (EPFO) is responsible for managing the fund and ensuring the welfare of all stakeholders.
It is important to note that as per the EPFO’s 2021-22 report, a total of Rs. 6,89,211 crore has been deposited in the Pension Fund. In the fiscal year 2021-22, the EPS fund earned an interest of Rs. 50,614 crore.