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His employers have put in nearly 85,000 in a scheme on his behalf but Prashant Jangale does not know how, when or what he will get in return. The Mumbai-based marketing professional is not aware that as a member of the Employees' Provident Fund (EPF), he is eligible for a monthly pension for life after he turns 58. After him, his wife will receive pension for life.

Jangale is not alone. Almost 59% of the respondents to an online survey conducted last month by economictimes. com were unaware that private-sector employees covered by the EPF are also eligible for lifelong pension. More than 30% of these respondents have contributed 65,000-1 lakh to the Employees' Pension Scheme (EPS) till now.

The amount flowing into the EPS every month is so small that most don't even notice the deduction. It is 8.33% of the employer's contribution to the EPF on behalf of the employee, with a cap of 6,500 a year. Even so, the monthly contribution of 541 has the potential to amass a huge sum over the long term. Even at a modest interest rate of 8%, this tiny amount can burgeon into 12.41 lakh in 35 years.

Sadly, this is not what happens to your contribution to the scheme. The amount just flows into a pension pool without earning any interest for you. If you have completed at least 10 years of service, you start getting pension from this pool after you turn 58. The pension amount is based on the number of years you had contributed to the scheme and your basic pay at the time of retirement. Here again there is a cap of 6,500. If you were in service for over 20 years, you get 2 bonus years as well.

This is not as cool as it may sound. Our calculations show that someone who joins at the age of 23 will get a pittance of 3,250 as monthly pension when he retires at 58. Instead of the EPS, if the money is put into an option that earns 8% it would grow to 12.41 lakh in 35 years. If annuitised at the current rates offered by the Life Insurance Corporation, this amount would generate a lifelong monthly pension of 8 242  

In other words, the EPS is giving out lesser pension than what your contribution could have earned. You must take into account that the EPS also gives life insurance cover and other benefits like pension to widows and children. These benefits come from the same pool into which everybody is contributing.

Ticking time bomb

The low returns is a minor problem compared to the crisis looming in the horizon. The defined benefit model is not sustainable. Things are not looking too bad right now because there are more contributors than beneficiaries. In 2011-12, for instance, the EPS received contributions worth 14,768 crore and paid out benefits worth 7,859 crore. The scheme's corpus increased 14% to 1,83,429 crore during the year.

But this situation would change in the coming years as India's demographic dividend transforms into a geriatric nightmare. In 2012, only 8% of the Indian population was above 60 years. Studies have estimated that this figure would rise to 12.4% by 2026 and to 19.1% by 2050. With every passing year, the pool of pensioners will become larger even as the number of contributors will rise at a slower pace.

That's not all. Life expectancy too is on the rise. The average Indian lives up to 68.4 years. In urban centres, life expectancy is higher by about 5 years. By 2030, the average urban Indian would be living till the age of 80, putting more pressure on the pension payments. This also means that by the time GenX gets a farewell party at office, the EPS might have gone bust.

Panel's recommendations rejected

Three years ago, an expert panel had suggested that the EPS be replaced with a provident fund-cum-annuity combo under which contributions would flow into individual accounts. Each member was to have two accounts—one for the Provident Fund and the other for the pension. The panel suggested that the balance in the pension account be used to buy an annuity for the individual when he retires. However, most of the modifications suggested by the expert committee were rejected by the CBT.

However, there are some positive points about the EPS as well. For instance, it offers the option of early pension to people who may have turned entrepreneurs or retired early. They can opt for pension after 50 but will have to forego 4% for every year before they turn 58. There is no option for early pension under the NPS.

Also, the EPS allows withdrawals if you have not completed 10 years of service. However, once a person has completed 10 years he can't withdraw and will have to wait till he turns 58 for the pension to start flowing.

Digging a deeper hole

The EPFO is now considering raising the contribution limit from 6,500 a year to 10,000 a year and giving a minimum pension of 1,000 a month. Both measures have the potential to dig a deeper hole for the EPS. Raising the limit would cause the pension outgo to shoot up. Retirees who contributed the lower amount of 6,500 a year would be eligible for pension based on the higher limit of 10,000. The last time the limit was raised from 5,000 to 6,500 in 2002, the scheme notched up a deficit of 10,000 crore. This time, a formula must be worked out to adjust the pension accordingly. The minimum pension limit will also put pressure on the scheme as lower income workers are cross subsidised by other members.

Already there are signs that all is not well. In the past 15 years, the scheme has slipped into the red. Experts estimate that it now has a deficit of almost 54,000 crore. Of course, this is a noptional deficit based on the pension payable to the existing members. However, the EPFO has disputed these estimates, saying that they are not statistically robust. "The valuations computed the pension liability by extrapolating the age and income data of 5% subscribers whose details were available with us. We have now provided data on 70-75% of the subscribers to the actuaries. Their valuation report, which is expected soon, will give a more realistic assessment of where the EPS stands," says Central Provident Fund Commissioner Krishan Kumar Jalan.

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