Report of the Expert Committee on Emplyees' Pension Scheme, 1995

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REPORT OF THE EXPERT COMMITTEE ON EPS,1995 1 The Central Government vide Order No. R-15025 /3/2007/SS.II dated 12.06.2009 appointed Expert Committee on Employees’ Pension Scheme, 1995 to look into the Employees’ Pension Scheme 1995 and to give expert views. Sh. S. K. Srivastava Additional Secretary Ministry of Labour & Employment Chairman Joint Secretary(Social Security) Ministry of Labour & Employment Member Dr. K.C. Mishra Director National Insurance Academy, Pune Member Sh. Nalin Thakor President, Social Security Research Centre, Ahmedabad Member Sh. S.P. Subhedar Fellow of Institute of Actuaries of India, AIA(UK), Retd. M.D. of LIC of India Member Sh. Bhudev Chatterjee Actuary Member Sh. Nirmal Ghosh Organising Secretary Indian National Trade Union Congress Member Dr. R. Kannan Actuary Insurance Regulatory Development Authority Member Sh. J.P. Chowdhary Chairman & Managing Director (CIE) Member Central Provident Fund Commissioner Employees’ Provident Fund Organisation Member Sh. Rajesh Bansal Addl. Central Provident Fund Commissioner (Pension) Employees’ Provident Fund Organisation Member Secretary     REPORT OF THE EXPERT COMMITTEE ON EMPLOYEES' PENSION SCHEME, 1995   INDEX    S.No.  Subject  Page No.    1. Constitution of the Expert Committee on Employees’ Pension  Scheme, 1995    4  2. Background of Employees' Pension Scheme 1995    5  3. Features of the Employees' Pension Scheme 1995    7  4. Performance of the Employees' Pension Scheme 1995    9  5. Challenges Thrown By The Experience of Employees’ Pension  Scheme, 1995    14  6. Working of the Expert Committee    16  7. The Possible Alternative Scenarios: Existing Scheme    19  8. Provident Fund‐cum‐Pension Annuity    Scheme – An Alternative  34  9. S   ummary of Final Recommendations  39    REPORT OF THE EXPERT COMMITTEE ON EPS,1995 2   APPENDICES    S.No. Appendix    Page No.  1. Minutes of The First Meeting of The Expert Committee    43  2. Minutes of The Second Meeting of The Expert Committee    46  3. Minutes of The Third  Meeting of The Expert Committee    56  4. C M hronology of The Changes In Statutory Wage Limits Under EPF &  P Act, 1952     61  5. Interest Earning Analysis    62  6. A S nalysis  of  Outgoing  Payments  Under  Employees’  Pension  cheme,1995     63  7. R T eport of The Valuer on Various Proposals Under Consideration of  he Committee @ 8%.    65  8. R T eport of The Valuer on Various Proposals Under Consideration Of  he Committee @ 7.5%.    69  9. S o ummary of The Comments of The Members of Expert Committee  n The Proposed Conceptual Draft     73  10. C P   omparison  of  The  Proposed  PFPAS  (Provident  Fund‐Cum‐ ension Annuity Scheme) With NPS (New Pension Scheme)   78      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 3 CHAPTER 1    CONSTITUTION OF THE EXPERT COMMITTEE ON     EMPLOYEES’ PENSION SCHEME, 1995    1.1  In  March  2008,  the  Government  of  India  constituted  a  committee  for  comprehensive review of Employees' Pension Scheme 1995, giving it the mandate to look  into  all  possible  ways  and  means  to  meet  the  demands  of  the  members/beneficiaries  while ensuring the long term viability of the Scheme. Subsequent to the recommendations  of  this  committee,  the  Government  of  India  constituted  an  Expert  Committee  on  Employees’  Pension  Scheme'1995  on  12.06.2009,  under  the  Chairmanship  of  Shri  S.  Krishnan, the then Special Secretary, Ministry of Labour & Employment, Government of  ndia.   I   1.2  Subsequent  to  the  transfer  of  Shri  S.  Krishnan,  the  Ministry  appointed  Shri  S.K.  Srivastava, Additional Secretary, Ministry of Labour & Employment, as the Chairman of  the Committee with effect from 26.11.2009. The constitution of this Committee is given  on the cover page of the Report. The Committee held three meetings – on 01.12.2009,  on  02.02.2010  and  on  23.07.2010.  The  minutes  of  these  meetings  are  at  Appendix­1,  Appendix­2  and  Appendix­3  respectively.  In  between  these  meetings,  the  discussion  among the members continued through e‐mails.    REPORT OF THE EXPERT COMMITTEE ON EPS,1995 4   CHAPTER 2    BACKGROUND OF EMPLOYEES' PENSION SCHEME 1995    2.1  The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 provided  social  security  benefits  to  the  employees  through  Employees’  Provident  Fund  Scheme,  1952  by  creating  a  Provident  Fund  to  which  both  the  employers  and  the  employees  contribute  a  percentage  of  the  wages  of  the  employees  in  equal  share.    However,  this  scheme was not found adequate to meet the social security needs of the employees and  there was demand for the introduction of a Pension  Scheme.   Accordingly on 1st March,  1971 a Scheme to provide pension to the family of the employee who died in service was  introduced called the Family Pension Scheme, 1971. The important provisions of Family  ension Scheme, 1971 were as follows:  P   2.2  BENEFITS UNDER THE PROVISIONS OF FAMILY PENSION SCHEME, 1971, THE  FOLLOWING  BENEFITS  WERE  PROVIDED  TO  THE  MEMBERS  AND  THEIR  FAMILIES.  1 Life‐long pension to spouse upon death of the member while in service.  2 Pension to one child (eldest) up to age 25 (or marriage, if earlier, in case of    female child) upon death/re‐marriage of the spouse pensioner.  3 Life  Assurance  benefit  of  Rs  5000/‐  to  the  widow/widower/nominee  upon  death  of  the  member,  provided  that  the  contributions  to  the  Pension  Fund  were received for a period of at least 3 months.  4 Return  of  employee  share  of  contribution  (with  interest)  to  the family  upon  death of the member before putting in 3 months of service.  5 Return of employee share of contribution (with interest) to the member upon  cessation of membership before putting in 1 year of service.  6 Retirement‐cum‐Withdrawal  benefit  to  the  member  upon  cessation  of  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 5 membership after putting in at least 1 year of service.     2.3  The benefits under the Family Pension Scheme were reviewed periodically and by  1995  minimum monthly pension was Rs 250/‐ for the lowest salary slab (up to Rs 300/‐)  and the maximum was Rs 1050/‐  for the highest salary slab (exceeding  Rs 2500/‐).  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 6 2.4  Quantum of Retirement‐cum‐Withdrawal benefit was as per the rates in the table  provided in the Schedule of Employees’ Family Pension Scheme 1971, which provided for  a minimum of 0.2 times the wage at cessation for 1 year of contributory service and a  aximum of 12.08 times the wage at cessation for 40 years of contributory service.  m     2.5  FUNDING:    2.5.1  The  Scheme  was  funded  by  contributions  made  from  three  sources  viz  the  mployee, the employer and the Central Government.  e   2.5.2  Each  contributed  1.16%  of  the  wage  of  employee  every  month.  Thus,  a  total  of  3.48% of the member’s wage was contributed every month towards the Family Pension  und.  F   2.5.3  The Employee’s and the Employer’s contributions came by way of diversion from   PF  contribution. In other words, out of the contributions made by the Employee and the  Employer towards the PF account of the member 1.16% of wages was diverted to the  Family Pension Fund. The Central Government’s contribution i.e. 1.16% came directly to  and  solely  for  the  Family  Pension  Fund.  The  Central  Government  in  addition  met  the  entire cost of administration of the Family Pension Scheme.    2.5.4  However, the wage upon which 1.16% was to be calculated was restricted due to a  statutory  limit  on  wages  on  which  contributions  could  be  made.  The  wage  limit  was  evised from time and the details are in Appendix­4.   r   2.6  TRANSITION TO A NEW SCHEME:     2.6.1  Soon  after  its  launch  in  1971,  demands  were  raised  that  the  old  age  security  benefit should also be provided to the member. In other words, pension to the member  upon retirement/superannuation, and in case of contingencies like disability was being  demanded. The Government acceded to these demands by notifying a new Scheme with  effect  from    16.11.1995,  called  the  Employees'  Pension  Scheme,  1995  replacing  the  erstwhile Family Pension Scheme, 1971 and the net assets of the Family Pension Scheme  1971 were transferred to Employees’ Pension Fund.  CHAPTER 3  CHAPTER 3    FEATURES OF THE EMPLOYEES' PENSION SCHEME 1995  FEATURES OF THE EMPLOYEES' PENSION SCHEME 1995    3.1  Employees'  Pension  Scheme,  1995  not  only  provides  improved  benefits  to  the  amilies; it also provides pension and other benefits to the member.     3.1  Employees'  Pension  Scheme,  1995  not  only  provides  improved  benefits  to  the  amilies; it also provides pension and other benefits to the member.   f   3.2  This  scheme  provides  comprehensive  benefits  for  members  and  within  the  onstraints of a funded scheme is providing for various contingencies.    3.2  This  scheme  provides  comprehensive  benefits  for  members  and  within  the  onstraints of a funded scheme is providing for various contingencies.  c    c    3.3  BENEFITS UNDER THE PROVISIONS OF EMPLOYEES’ PENSION SCHEME, 1995,  .3  BENEFITS UNDER THE PROVISIONS OF EMPLOYEES’ PENSION SCHEME, 1995,  TO THE MEMBERS AND THEIR FAMILIES.    i. Member Pension upon  retirement /superannuation.  ii. Member Pension upon disablement while in service.  iii. Withdrawal Benefit upon leaving service after putting in less than 10 years but  more than six months of service.  iv. Spouse Pension upon death of member.  v. Spouse Pension upon death of member as pensioner.  vi. Children Pension along with spouse pension (up to age 25).  p to age 25).  vii. Orphan Pension upon death or remarriage of spouse (u v iii. Disabled Child Pension to children/orphan (life‐long).  i x. Nominee Pension to the Nominee when no family exists.  x. Dependent Parent Pension when no family and nominee exists.    3.4  BASIS FOR CALCULATION OF PENSION    3.4.1  The Pension to the member for  service after 15.11.1995 is calculated by a simple  formula:‐  Pensionable Sala ensionable Service  ry x P      70  where,    REPORT OF THE EXPERT COMMITTEE ON EPS,1995 7 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 8 Pensionable Salary = average salary on which contributions received/ receivable during  he last 12 months of service.  t   Pensionable  Service  =  period  of  service  during  which  contributions  are  received  or  receivable    3.4.2  For service under Family Pension Scheme, 1971 i.e. prior to 16.11.95, past service  benefit is given which is added to the pension calculated as above to arrive at the total  ension.  p   3.5  FUNDING:     3.5.1  The Scheme is funded by contributions made from two sources viz. the employer  nd the Central Government.  a   3.5.2  The  Government’s  contribution  continued  to  be  1.16%  of  the  member’s  monthly wage, Employees’ contribution of 1.16% made in Family Pension Scheme,  1971  was  discontinued  in  Employees  Pension  Scheme,  1995  and,  the  Employer’s  contribution was increased from 1.16% in Family Pension Scheme 1971 to 8.33%  in Employees’ Pension Scheme,1995. Thus, a total of 9.49% of the member’s wage was  ontributed every month towards the Employees’ Pension Fund.  c   3.5.3  In this Scheme also, the wage upon which 8.33% and 1.16% are to be calculated  were restricted due to a statutory limit on wages on which contributions could be made.  The wage limit was revised from time to time as per details in Appendix­4.     3.6  IMPROVEMENT OVER FAMILY PENSION SCHEME'1971:    3.6.1  Several new benefits were provided to the members under Employees'  Pension  S e ch me, 1995. These are as follows:    1. Member Pension upon retirement/superannuation.  ervice.  2. Member Pension upon disablement while in s 3. Spouse Pension upon death of member as pensioner.  o age 25).  4. Children Pension along with spouse pension.  5. Orphan Pension upon death / remarriage of spouse (up t 6. Disabled Child Pension to children/orphan (life‐long).  7. Nominee Pension to the Nominee when no family exists.  8. Dependent Parent Pension when no family and nominee exists.  CHAPTER 4  CHAPTER 4    PERFORMANCE OF THE EMPLOYEES' PENSION SCHEME 1995 PERFORMANCE OF THE EMPLOYEES' PENSION SCHEME 1995    4.1  The Employees’ Pension Scheme, 1995 was framed with the objective of providing  reg r ula  old age income under the following assumptions:  1  The Pension Fund shall have adequate interest earnings so as to ensure reasonable  pension and other benefits to the members and their families.  2  Members would continue with their membership and continue to contribute to the  scheme so as to avail most of the  retirement/ superannuation benefits in the form  of regular income rather than availing premature benefits.  3  The  statutory  wage  limit  would  only  be  increased  with  prior  actuarial  analysis  since it was a defined benefit Scheme and the wage limit  may increase the deficit  in the EPS, 95.  Similarly, any change in the benefits provided under the  Scheme  would  only  be  made  after  making  a  proper  actuarial  analysis.  under  para‐32 of  Employees’ Pension Scheme,1995 following the annual actuarial valuation, so as to  keep the scheme viable.    .2  4   However, the actual experience with the Scheme has been as follows:  1 The interest rate regime has fallen consistently from around 12% pa in 1996 to  less than 8% pa in 2006. Interest Earnings Analysis as per the data in Valuation  Reports is shown in Appendix­5. This has had an adverse impact on the earnings  and consequently the monthly pension amounts.  This has also resulted in high  actuarial deficits basically because of the wide spread of benefits.    2 Members do not continue for long in the Scheme and like to withdraw their money  whenever they are changing jobs before putting in ten years of service. There has  been  an  unusually  high  incidence  of  early  withdrawal  payments.  Similarly,  the  number of early pension optees is far more than those opting for superannuation  pension. Analysis of Outgoing Payments is shown in   Appendix­6. From the same  it is seen that the premature withdrawals are as  high as 34.4% of the payments.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 9   REPORT OF THE EXPERT COMMITTEE ON EPS,1995 10 3 The statutory wage limit was increased in 2001 from Rs 5000 to Rs 6500 without  being backed up by an actuarial advice.  This injected an instant actuarial deficit to  the tune of Rs 10,000 crore in the EPS’95 Fund as no provision was made to obtain  the contributions on the enhanced salary for the earlier period of service already  put  in  on  which  the  benefits  would  eventually  be  paid  at  the  time  of  uperannuation.  This can be explained with the help of an illustration as follows:  s   Illustration: Suppose a member, drawing a basic wage of Rs 6500 per month in  1996, was contributing to Pension Fund @ Rs 5000 per month due to the statutory  age ceiling of Rs 5000 at that time.  w   In  2001,  the  wage  ceiling  was  increased  to  Rs  6500  and  the  member  starts  contributing  to  Pension  Fund  @  Rs  6500  per  month.  At  the  time  of  superannuation,  he  becomes  entitled  for  pension  with  pensionable  salary  of  Rs  6500 and the resultant calculations thereto. Thus, whereas he contributed @ Rs  5000 for a certain period of pensionable service, he became entitled for pension at  a  pensionable  salary  of  Rs  6500.  This  anomaly  needs  to  be  accounted  for  by  breaking the benefit in two parts – one for the period when the pensionable salary  was Rs 5000 and the other when it was Rs 6500 and the same should have been  actored in.  f   Salary rise is normal in the career life span of an individual and the same is also  taken  into  account  during  actuarial  calculations.      However,  before  effecting  an  amendment in wage ceiling, it should be backed by infusion of additional funds by  way of additional contributions or modification in benefits calculation as may be  actuarially found feasible.    4 The  provision  of  voluntary  contribution  beyond  the  statutory  wage  ceiling  with  the  mutual  consent  of  the  employee  and  the  employer  was  introduced  in  1996  without compensating for Government contribution which remains fixed at 1.16%  upto  wage ceiling  only.  This is also  a  cause  of  increasing  deficit  whenever  such  option is granted/exercised. This has also introduced an about marginal element  of cross‐subsidization from lower income to higher income group.    REPORT OF THE EXPERT COMMITTEE ON EPS,1995 11 5 Several amendments liberalising the benefits under EPS'95 were made after the  launch  of  the  Scheme  in  1995.  Dependent  Parent  Pension  was  introduced  in  March’1999;  Pension  to  disabled  children/orphans  for  life  was  introduced  in  March’1999;  The  rates  of  minimum  pension  in  respect  of  widow  /  children/  rphan pension were increased in January’2000.   o   6 diate corrective steps such as:  Each Annual Valuation Report had called for imme i  Improvement in quantity and quality of data   the decreasing rate of returns  ii  Increase in contributions to match iii  Disincentive for early withdrawal  v  Alteration in the scale of several benefits  i   However,  necessary  steps  were  not  initiated  to  implement  the  above  modifications.  Some measures to check the large deficit were taken at a late stage  in the year 2008.    7 The  Pension  Fund  was  in  actuarial  surplus  during  the  first  four  years,  ie  from  1996‐2000. Hence, reliefs were declared to the eligible pensioners as follows:    Valuation Number  Date  of  Valuation  Recommended  rate  of  relief on original pension   1st Actuarial Valuation   15/11/1996   4%   2nd Actuarial Valuation   31/03/1998   5.5%   3rd Actuarial Valuation   31/03/1999   4%   4th Actuarial Valuation   31/03/2000   4%    Thus,  a  pensioner  of  1996,  continuing  in  2000,  got  an  increase  of  17.5%  on  is/her original pension.  h   After 2000, the Pension Fund came in actuarial deficit because of which no further  elief could be announced by the Government.  r   REPORT OF THE EXPERT COMMITTEE ON EPS,1995 12 4.3  CAUSES OF ACTUARIAL DEFICIT     4.3.1  ses of actuarial deficit:  The following can be broadly categorized as the cau 1. Mismatch in expected rate of investment return.  2. Mismatch in expected pattern of exit from the Scheme.  out  being backed up by actuarial advice.  3. Amendments in the Scheme with 4. Delay in taking remedial action.    4.4  In view of the above factors, the Employees Pension Scheme,1995 Fund came into  actuarial deficit in the year 2000‐01 and the deficit since then has continuously increased  s shown below in the tabular as well as graphical form:  a   Valuation  Period of Valuation  Surplus/ Deficit (in Rs Cr)  1st  16.11.1995 to 15.11.1996  +1689  2nd  16.11.1996 to 31.03.1998  +1239  3   rd 01.04.1998 to 31.03.1999  +732  4th  01.04.1999 to 31.03.2000  +70  5   th 01.04.2000 to 31.03.2001  ‐ 43  6th  01.04.2001 to 31.03.2002  ‐17,136  7   th 01.04.2002 to 31.03.2003  ‐19,291  8th   01.04.2003 to 31.03.2004  ‐22,021  9th‐10th  combined)   ( 01.04.2004 to 31.03.2006  ‐22,659                   The graphical depiction of the above table is as follows:              4.5  In order to address the above causes of deficit, the major recommendations of the  Actua al V ri aluation Reports are as follows:  1. Increase in the rate of contribution from 8.33% to 11.75%.  e increase in wage ceiling.  2. Need to take requisite measures in case of futur 3. Increase the age of vesting from 58 to 60 years.  4. Revision of Table ‘B’ & ‘D’ (withdrawal benefit).  % in early pension cases.  5. Increase in the reduction rate from 3% to 5 6. Discontinuing the option of Commutation.  7. Discontinuing the option of Return of Capital     8. Liberalising the pattern of Investment with a view to achieve higher returns.    4.6  Of these recommendations, those at S.No. 4 to 7 have already been implemented  with certain modifications. As a result, the deficit in the last Valuation (9th & 10th) has  remained at almost the same level as that of 8th Valuation.  Here, still the cause of concern  is that the deficit has only been arrested but has not declined.  The recommendations at  S.No.  1  to 3  have  been  considered  in this  Report.     As regards the recommendation at  S.No.8,  the  issue  is  a  continuing  process  and  the  matter  needs  to  be  addressed  by  the  Central Board of Trustees.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 13 CHAPTER 5    CHALLENGES THROWN BY THE EXPERIENCE OF   EMPLOYEES’ PENSION SCHEME, 1995    5.1  At present the three basic  challenges for Employees’ Pension Scheme, 1995 are as  follows:  1 Static pension, i.e. pension not linked to inflation.  2 Statutory ceiling  of Rs. 6500/‐ per month on contributory wage.  3 The continuing actuarial deficit given the present set of benefits.    5.2  The  amounts  of  benefit  envisaged  at  the  time  of  introduction  of  Employees’  Pension Scheme, 1995 have decreased in real terms with each passing year due to the  effects of inflation. Non‐indexation of these benefits to inflation has resulted in decrease  in real pension.  Moreover, the wage ceiling on wage  of Rs. 6500/‐ per month upon which  the  contributions  can  be  made  are  not  in  tune  with  rising  wage  levels.  Hence,  the  quantum of pension benefit being received by the pensioners is becoming increasingly  insufficient to cater to the daily needs of the pensioners.   On the other hand, given the  existing rate of contribution and the benefits defined in the scheme, the actuarial deficit   s continuously increasing with every successive valuation.  i   5.3  In addition to the major challenges stated above, there are number of demands  from the members and pensioners directly related to Employees’ Pension Scheme, 1995  as well as other peripheral demands.  The Parliamentary Standing Committee on Labour  on  the  EPFO  –  Employees’  Pension  Scheme,  1995  has  also  given  recommendations  on  such demands.  These demands/recommendations are listed as below:  i. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 14   Provision for minimum pension.    ii. Restoration of provisions of Commutation and Return of Capital.  iii. Declaration  of  pension  relief  regularly  as  was  done  after  the  first  four  valuations  i  towards EPS’95   v. Increase in rate of contribution of employer and Govt. f 50 years   v. Grant of Pension before attaining the age o vi. DA to pensioners linked with price index   REPORT OF THE EXPERT COMMITTEE ON EPS,1995 15 vii. Increase in wage ceiling.  v  60 years   iii. Raising the superannuation age from 58 to i x. Pension at par with Central Government.   x. Other miscellaneous demands such as providing membership option to those  retiring  before  01.04.1993;  granting  a  lump‐sum  upon  death  of  the  pensioner; providing unused agricultural land free to pensioners, not owning  houses,  by  the  Central/State  Government,  free  medical  assistance  to  EPF  Pensioners etc..    5.4  The Committee, during the course of its discussions in the meetings, has carefully  considered all these issues and their effect on the Employees’ Pension Fund especially in  view of the actuarial inputs provided by the Actuary and have made its recommendations  accordingly.  CHAPTER 6    WORKING OF THE EXPERT COMMITTEE  6.1  The Expert Committee on Employees’ Pension Scheme, 1995 held three meetings.  The first on the 1st  December 2009, the second on the 2nd February 2010 and the third on  he 23rd July 2010.  t   6.2  Initially,  the Committee examined the status of the Employees’ Pension Scheme,  1995  keeping  in  view  the  Fund  position  and  deliberated  on  various  suggestions  and  recommendations received so as to arrive at viable and feasible alternative solutions  by  modifying the provisions of the existing Scheme.  In the second meeting, the Committee  approved  many  proposed  amendments  in  Employees’  Pension  Scheme,  1995.  The  proposal that the member should be given the option to authorize the employer to divert  1.16% extra from employer’s contribution so that the total contribution remains 9.49% in  case  of  voluntary  contribution  over  the  wage  ceiling  was  approved  by  the  Committee.  Proposals to increase the pensionable age from 58 to 60 years, to disallow the option of  early pension, to discontinue the provisions of Nominee Pension outside family, to raise  the early pension vesting age from 50 to 55 years , merger of Employees’ Deposit Linked  Insurance Scheme, 1976  in Employees’ Pension Scheme, 1995, to conduct valuation of  the  Pension  Fund  once  in three years instead  of  every  year and to  pay  interest  to  the  member  for  delayed  payment  of  pension  were  also  approved  by  the  Committee.    The  Committee also approved that the expected financial impact of these proposals shall be  btained from the Actuary before arriving at the final recommendations.  o   6.3  The  Committee  noted  that  other  proposals  relating  to  hike  in  wage  ceiling,  increase in minimum pension, increasing the rate of contribution under the Employees’  Pension  Scheme,  1995  and  possibility  of  providing  for  an  annual  hike  need  to  be  ctuarially evaluated to know the expected financial impact thereof.    a REPORT OF THE EXPERT COMMITTEE ON EPS,1995 16   6.4  The discussions between the members of the expert Committee continued via    e‐ mail.    Meanwhile,  the  Committee  was  also  provided  with  the  Actuarial  impact  of  the  various  proposals  approved/  considered  by  the  Actuary  M/s  K.A.  Pandit.  As  the  Committee  discussed  the  various  pros  and  cons  of  the  demands,  suggestions  and  17 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 expectations of various stakeholders it became increasingly clear that though the scheme  can be made sustainable by rationalizing the existing benefits and/or scale of benefits, it  may  not be possible to rationalize the benefits once for all and therefore in future, there  may again be a need for further   amendments/modifications. The committee also noted  that the higher benefits being demanded can not be given without increasing the rate of  contribution and even with the increase in contribution,  the benefits can not be sustained  n a firm basis.  o   6.5  The  financial  impact  of  the  various  alternatives  made  it  clear  that  increase  in  minimum pension is feasible only for future pensioners as increasing the pension of the  existing pensioners enhances the financial burden manifold. The committee also found  from the actuarial inputs that the increase in wage ceiling was possible only if pension is  calculated separately for pensionable service and salary prior to increase in wage ceiling  nd post increase in wage ceiling.   a   6.6  The in‐depth analysis of the  actuarial inputs  led the Committee to examine that  along with arriving at feasible amendments in the existing Employees’ Pension Scheme,  1995, the Committee must also attempt to find a totally new alternative solution to the  existing Scheme because even though the Pension Fund is running into actuarial deficit as  the  benefits  under  the  scheme  are  more  than  what  the  fund  can  sustain,  still  the  beneficiaries are not satisfied with these benefits and have been demanding increase in  benefits.  These  discussions  led  to  the  conceptualization  of  a  new  alternative  i.e.  replacement  of  the  Employees’  Pension  Scheme,  1995  with  a  Provident  Fund‐cum‐  Pension  Annuity  Scheme.  The  committee  noted  that  having  a  Defined  Contribution  Scheme  with  an  element  of  insurance  would  lead  to  more  equity  and  transparency  in  enefit accumulation and distribution.  b   6.7  In the final meeting of the Committee, the draft report was discussed in detail and  after deliberations it was decided that two final recommendations might be made.  The  Committee  felt  that  the  best  solution  should  be  to  replace  the  existing  Employees’  Pension Scheme, 1995 with the proposed Provident Fund‐cum‐Pension Annuity Scheme.  However, it was agreed that in case the Central Board of Trustees does not favour the said  recommendations as an alternative, a benefit package modifying the existing Employees’  Pension Scheme, 1995 by increasing the rate of contribution and without changing the  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 18 basic structure of the Scheme, should also be recommended.  It was also agreed that the  Committee would also point out the need for collecting adequate number of data so that  the sample for any valuation of the Employees’ Pension Fund be adequate.  It was also  decided that if the existing  Employees’ Pension Scheme, 1995 is continued the actuarial  valuation of the Employees’ Pension Fund may be conducted after every three years and  immediate remedial measures be initiated.     CHAPTER 7    THE POSSIBLE ALTERNATIVE SCENARIOS:EXISTING SCHEME    7.1  During  discussions  as  already  pointed  out  in  previous  Chapter,  the  Expert  Committee  decided  to  assess  the  actuarial  impact  of  several  possible  amendments  in  Employees’  Pension  Scheme,  1995  to  have  a  clear  and  definite  implication  of  the  various  suggestions  being    considered  by  the  Committee  and  to  make  informed  recommendations on a sound analytical basis.   The task of carrying out the actuarial  effect  of  the  suggestions  under  consideration  was  given  to  the  M/s.  K.A.  Pandit  Consultants & Actuaries.  The Actuary submitted his report on 08.07.2010, based on the  prevailing  range  of  discount  factors  of  8%  and  7.5%.    The  summary  of  the  detailed  suggestions along with actuarial impact is placed at Appendix 7 with an average interest  ate of 8% and at Appendix 8 with an average interest rate of 7.5%.  r    7.2  The wage ceiling limit presently is Rs 6500 per month. However, considering the  present wage trends and also the fact that wage ceiling was last revised w.e.f 01.06.2001,  the Committee was of the clear and firm opinion that in any recommendation, the wage  ceiling needs to be revised upwards. Hence, the Committee taking note of the fact that  ESIC has recently adopted a wage ceiling of      Rs 15,000/‐, it decided to analyze the  various scenarios keeping the statutory wage ceiling in two alternatives i.e. Rs. 10,000  and  Rs 15,000 per month. In order that there is a wider scope for decision making on the  basis of the Actuarial analysis, six scenarios have been worked out for a wage ceiling of Rs  10,000  and  Rs.  15,000  per  month.  It  was  noted  by  the  Committee  that  any  such  enhancement in wage ceiling limit shall have to be done prospectively and the ultimate  benefit shall be paid in two parts – one accruing due to contributions made prior to wage  ceiling enhancement and the other accruing due to contributions after such enhancement.  uch an approach is necessary to ensure the long term sustainability of the Scheme.   S   7.3  It is seen that the only way the Scheme can provide for increased wage ceiling and  other benefits as analyzed in the scenarios is through increased contribution rates. The  Committee during discussions in the first meeting came to the conclusion that increased  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 19 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 20 contribution  rates  may    range  from  11.49%  to  18.33%  which  can  be  provided  for  as  ollows:   f   Employer  Government  Employee  Total  10.33  1.16  0  11.49  10.33  2.5  0  12.83  10.33  2.5  2  14.83  12.00  2  2  16.00  12.00  4  2  18.00    However,  subsequently  in  the  third  meeting,  another  set  of  contribution  rate  was  worked out as explained in Scenario 6.  For the first five scenarios, the analysis has  therefore been worked out on the basis of the above table. The exact rates that have  been  found  feasible  based  on  facts  and  actuarial  inputs  are  mentioned  in  the  following pages under each scenario and options considered and recommended by  the Committee.    7.4  On the basis of analysis of the projections provided by the Actuary and discussions  held  by  the  Committee,  the  following  six  different  scenarios  with  wage  ceiling  of  Rs  15,000/‐ pm and for wage ceiling of Rs 10,000/‐ pm; with a discounted rate of 8% have  een considered for recommendations:‐   b   Scenario  1:  Sustaining  the  Scheme  by  continuing  with  the  present  rate  of  ation of present benefits.  contribution, i.e. 9.49%, through rationaliz Option 1: for Wage ceiling of Rs 15,000/‐ pm  Option 2: for Wage ceiling of Rs 10,000/‐ pm.    Scenario 2: Sustaining the Scheme by continuing with the present benefits, but with  increased  rate of contribution.   Option 1: for Wage ceiling of Rs 15,000/‐ pm  Option 2: for Wage ceiling of Rs 10,000/‐ pm.     REPOR ON EPS,1995 21 T OF THE EXPERT COMMITTEE Scenario  3:  Sustaining  the  Scheme  by  restoring  benefits  withdrawn  under  three  te of contribution.  amendments of 2008, by increasing the ra Option 1: for Wage ceiling of Rs 15,000/‐ pm  Option 2: for Wage ceiling of Rs 10,000/‐ pm.    Scenario 4: Sustaining the Scheme by providing for minimum pension Rs. 1000 for  future pensioners.  Option 1: for Wage ceiling of Rs 15,000/‐ pm  Option 2: for Wage ceiling of Rs 10,000/‐ pm.     Scenario 5:  nimum hike of 3% p.a.  Sustaining the Scheme by providing for mi Option 1: for Wage ceiling of Rs 15,000/‐ pm  Option 2: for Wage ceiling of Rs 10,000/‐ pm.    Scenario  6:  The  scenario  worked  out  in  the  3rd  and  final  meeting  of  the  Expert  ee on the basis of wage ceiling of Rs. 10,000/­.  Committ       Detailed analysis of the Six scenarios: These scenarios are discussed in detail in the  ollowing pages.   f   It may be noted that the scenarios have been worked out based upon a small sample of  members.  The relevant extracts from the Actuary’s Report is given below:    “The  total  membership  of  the  EPS,  95  Scheme  as  on  the  valuation  date  is  44,547,765. On a thorough scrutiny, the information about 2,439,558 members  was found consistent and complete. Based on this sample, after a careful study of  the  exits  on  various  counts  from  the  Employees’  Pension  Scheme,  1995  and  Employees’  Provident  Fund  Schemes,  a  projection  was  made  to  arrive  at  the  estimate of information of all members in respect of age, salary and duration since  ntry. The valuation was made on the basis of this projection.”  e    “…….on  a  careful  analysis  of  this  data  a  projection  was  made  about  the  likely  distribution of the total membership of the Scheme age wise along with duration  since entry and salary……...” .  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 22   For a scheme covering establishment having diverse employees age profile, diverse salary  structure and diverse duration of service, any projection of the total population on the  basis of 5.48% data and that to not a representative sample data, would  have  its  own  imitation and need recognition in decision‐making.  l   It is agreed that in a Pension Scheme covering 44,547,765 members, data maintenance is  a huge task and there would always be some deficiencies in the data.  However, these  deficiencies are of enormous proportions in the case of Employees’ Pension Scheme, 1995  and  the  authorities  need  to  address  this  issue  on  priority  basis  if  the  scheme  is  to  be  continued in its present form of defined benefits or else there will always be a lurking  ncertainty about its long term sustainability.   u   SCENARIO 1   1      TO SUSTAIN THE SCHEME WITH THE   TO SUSTAIN THE SCHEME WITH THE   PRESENT RATE OF CONTRIBUTION   PRESENT RATE OF CONTRIBUTION     Option 1: with Wage ceiling of Rs 15,000 Option 1: with Wage ceiling of Rs 15,000      1  In order to retain the total contribution at the present rate of 9.49% and to wipe  out the actuarial deficit of Rs 69,834 cr (as on 31.03.2009) as indicated at page 70  at  Appendix‐7,    the  following  five  modifications  in  Employees’  Pension  Scheme,  9 19 5 will have to be effected:  1) Pensionable Salary should be the average of last 3 years instead of 1 year as at  present  2) Withdrawal  Option,  i.e.  exit  from  the  Scheme  by  taking  a  lump‐sum  before  rendering 10 years of service should be deleted.  3) Bonus  of  2  yrs  upon  20  years  of  service  (at  superannuation)  should  be  discontinued..    4) Superannuation age should be from 58 to 60 years.  5) Early Pension before age 55 years should not be allowed.    2  Based on the projections provided by the Actuary, the Committee has been able to  find  that  with  the  above  modifications,  it  would  also  be  possible  to  provide  a  Minimum Pension of Rs 1000/‐ per month to all types of future pensioners, as may  be seen in the Table below:  All figures are in Rs crore  Base Deficit  ‐69,834 Saving due to Pensionable Salary of 3 years  8,774 Saving due to deletion of Withdrawal Option  6,776 Saving by disallowing bonus of 2 years  20,178 Saving due to raising of age of Superannuation to 60 years  27,076 Saving due to raising the age for Early Pension  12,028 Addition Burden for providing Minimum Pension of 1000/‐  ‐3012 (14042)* Net Surplus  1,986 (‐9044)*   REPORT OF THE EXPERT COMMITTEE ON EPS,1995 23 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 24 * The Committee also finds that if the benefit of minimum  pension is to be extended to  the existing pensioners, the surplus of Rs. 1986 crore shown in the above table would  turn into deficit of Rs. 9044 crores because the additional burden for providing minimum  pension of Rs. 1000/‐ would be of the order of Rs. 14042 crores in lieu of Rs. 3012 crores.  Option 2: with Wage ceiling of Rs 10,000       In order to retain the present contribution rate of 9.49% and to wipe out the actuarial  deficit  of  Rs  27,040  crore  (as  on  31.03.2009)  at  Appendix  ‐  7,  the  following  two  modifications in Employees’ Pension Scheme, 1995 will have to be effected:  1. Withdrawal Option, i.e. exit from the Scheme before rendering 10 years of service  should be deleted.      . Superannuation age should be raised from 58 to 60 years.  2   This  would  leave  the  fund  with  a  surplus  of  Rs  2,770  crore,  as  per  the  projections  provided by the Actuary. The detailed calculations are shown in the Table below:  (All figures are in Rs crore)  Base Deficit  ‐27,040 Saving due to deletion of Withdrawal Option  6,447 Saving due to raising of age of Superannuation to 60 years  23,363 Net Surplus  2,770   It is seen that the net surplus is just marginal.   SCENARIO 2  SCENARIO 2    TO SUSTAIN THE SCHEME WITHOUT ALTERING   TO SUSTAIN THE SCHEME WITHOUT ALTERING   THE CURRENT BENEFITS  THE CURRENT BENEFITS      Option 1: with Wage ceiling of Rs 15,000   Option 1: with Wage ceiling of Rs 15,000    In order to continue with the present structure of benefits, the Total Contribution to EPS  Fund would have to be raised to 11.75% (i.e. 2.26% extra). It would leave the Fund with an  estimated  actuarial  surplus  of  Rs  1,782  crore  This  has  been  worked  out  on  the  basis  of  projections provided by the Actuary, as shown in the Table below:  (All figures are in Rs crore)  Base Deficit  ‐69,834 Funds gener (i.e., due to 2 ated by raising the contrib .26% extra contribution)  ution to 11.75%   71,616 Net Surplus  1,782   p  f the c n rate of 11.75% be as follows:  The break u  o ontributio Employer     = 10.59 %  t  % (Existing)  Governmen   = 1.16 Employee    = 0%    Option 2: with Wage ceiling of Rs 10,000    In order to continue with the present structure of benefits, the total contribution to EPS  Fund would have to be raised to 10.49% (i.e. 1% extra). It would still leave the Fund with  an estimated actuarial surplus of Rs 620 crore, This has been worked out on the basis of the  projections provided by the Actuary, as shown in the Table below:  (All figures are in Rs crore)  Base Deficit  ‐27,040 Funds gener (i.e., due to 1 ated by raising the con % extra contribution)  tribution to 10.49%   27,660 Net Surplus  620   p  0.49% tion rate be as follows:  The break u  1  contribu REPORT OF THE EXPERT COMMITTEE ON EPS,1995 25     9.33 %  t   1.16% (Existing)   0%  Employer     = Governmen   = Employee    = SCENARIO 3  SCENARIO 3    TO SUSTAIN THE SCHEME IF THE BENEFITS WITHDRAWN UNDER THE  AMENDMENTS OF 2008 ARE TO BE RESTORED  TO SUSTAIN THE SCHEME IF THE BENEFITS WITHDRAWN UNDER THE  AMENDMENTS OF 2008 ARE TO BE RESTORED    Option 1: with Wage ceiling of Rs 15,000 Option 1: with Wage ceiling of Rs 15,000    The Government of India, vide its Notification No. 688(E) dated 26.09.2008 had made the  following amendments in Employees’ Pension Scheme, 1995 with a view to reduce the  c tinu on ing large deficit in the Scheme:  as increased from 3% to 4%.  1 The factor of reduction for Early Pension w d.  2 Option for Return of Capital was remove 3 Option for Commutation was removed.    In order to restore the benefits withdrawn under the above amendments and retain the  present benefits, the Total Contribution to EPS Fund would need to be raised to 17%. It  would leave the Fund with an estimated actuarial surplus of Rs 2,228 crore. This has been  worked out on the basis of the projections provided by the Actuary, as shown in the Table  below:  (All figures are in Rs crore)  Base Deficit  ‐69,834 Corpus generation by raising the contribution to 17 (i.e. due to 7.51% extra contribution)  %   2,37,981 Cost of restoring the Reduction Factor & Option o Commutation  f  ‐17,399 Cost of restoring the Option of Return of Capital  ‐1,48,520 Net Surplus  2,228   p  of  17.00% contribution rate can be  as follows:  The breaku Employer     =  12 %  t    Governmen   = 2.5%  mployee    = 2.5%  E REPORT OF THE EXPERT COMMITTEE ON EPS,1995 26       REPORT OF THE EXPERT COMMITTEE ON EPS,1995 27   Option 2: with Wage ceiling of Rs 10,000    For retention of the present benefits along with the restoration of the benefits withdrawn  under above three amendments, the Total Contribution to EPS Fund would need to be  raised  to  14.83%.  This  rate  of  contribution  would  also  enable  the  Fund  to  provide  a  Minimum Pension of Rs 1000/‐ pm to all types of future pensioners. This has been worked  out on the basis of the projections provided by the Actuary as shown in the Table below:  (All figures are in Rs crore)  Base Deficit  ‐27,040 Corpus generation by raising the contribution to 14 (i.e. due to 5.34% extra contribution)  .83%   1,47,707 Cost of restoring the Reduction Factor & Option o Commutation  f  ‐14,033 Cost of restoring the Option of Return of Capital  ‐99,223 Cost of providing the Minimum Pension of Rs 1000/‐ pm  ‐3,012 Net Surplus  4,399     he break up  of the contribution rate of 14.83%  is provided in the table at para 7.3.  T   SCENARIO 4    4     TO SUSTAIN THE SCHEME IF THE PROVISION OF MINIMUM PENSION OF  RS. 1000 IS MADE FOR FUTURE PENSIONERS  TO SUSTAIN THE SCHEME IF THE PROVISION OF MINIMUM PENSION OF  RS. 1000 IS MADE FOR FUTURE PENSIONERS    Option 1: with Wage ceiling of Rs 15,000 Option 1: with Wage ceiling of Rs 15,000       For  providing  minimum  pension  of  Rs  1000/­  per  month  to  all  types  of  future  pensioners  :  Presently,  the  Widow,  Children  &  Orphan  pensioners  are  entitled  to  a  minimum pension of Rs 450 Rs 250 and Rs 150 pm respectively. In order to raise all these  inimum pensions to Rs 1000/‐ p.m.   m     The total contribution would have to be raised to 12%.  This leaves a marginal  surplus of Rs 6692 crore. This has been worked out on the basis of the projections provided  by the Ac wn in the Table below:(All figures are in Rs crore)  tuary, as sho Base Deficit  ‐69,834 Corpus generated by raising the contribu (i.e. due to 2.51% extra contribution)  tion to 12%  79,538 Cost of providing the Minimum Pension  ‐3,012 Net Surplus  6,692     p   f  the c n rate of 12% be as follows:  The breaku o ontributio Employer     = 10.84 %  t  % (Existing)  Governmen   = 1.16 Employee    = 0%                REPORT OF THE EXPERT COMMITTEE ON EPS,1995 28       REPORT OF THE EXPERT COMMITTEE ON EPS,1995 29 Option 2: with Wage ceiling of Rs 10,000    The total rate of contribution with a wage limit of Rs. 10,000 would need to be  increased  to  10.75%.  This  leaves  a  marginal  surplus  of  Rs  4800  crore.  This  has  been worked out on the basis of the projections provided by the Actuary, as shown in  the Table below:    (All figures are in Rs crore)  Base Deficit  ‐27,040 Corpus generated by raising the contribu (i.e. due to 1.26% extra contribution)  tion to 10.75%  34,852 Cost of providing the Minimum Pension  ‐3,012 Net Surplus  4,800     p  of the contribution rate of 10.75% be as follows:  The break u Employer     =  9.59 %  t  % (Existing)  Governmen   = 1.16 mployee    = 0%  E   SCENARIO 5    5       SUSTAINING THE SCHEME BY PROVIDING FOR  SUSTAINING THE SCHEME BY PROVIDING FOR  MINIMUM HIKE OF 3% P.A.  MINIMUM HIKE OF 3% P.A.      Option 1: with Wage ceiling of Rs 15,000 Option 1: with Wage ceiling of Rs 15,000  For providing a pension hike of 3% per annum (compounded) to all types of future  pensioners: The Committee considered the demand of increasing the pension each year  on the basis of cost of price index and found that instead of providing an index‐based  increase every year,  an annual hike of 3% would be  more practical as per the following  details:    In this case, it would be possible to provide both the above benefit if, along with  the five amendments specified in Scenario 1, the total rate of contribution is increased to  16.75%. This has been worked out on the basis of the projections provided by the Actuary,  as shown in the Table below:  (All figures are in Rs crore)  Base Deficit  ‐69,834 Corpus generated by raising the contributio (i.e. due to 7.26% extra contribution)  n to 16.75%   2,30,059 Saving due to Pensionable Salary of 3 years  8,774 Saving due to deletion of Withdrawal Option  6,776 Saving by disallowing bonus of 2 years  20,178 Saving due to raising of age of Superannuation  years  from 58 to 60  27,076 Saving due to raising the age for Early Pension  12,028 Cost of providing 3% annual hike  ‐2,27,616 Cost of providing Minimum Pension of 1000/‐  ‐3,012 Net Surplus  4,429   p  of the contribution rate of 16.75% be as follows:  The break u REPORT OF THE EXPERT COMMITTEE ON EPS,1995 30 Employer     =  12 %  t   2.5%    2.25% Governmen   = Employee    =   REPORT OF THE EXPERT COMMITTEE ON EPS,1995 31   Option 2: with Wage ceiling of Rs 10,000    In this case i.e. with wage ceiling of Rs. 10,000, only the  total rate of contribution  will  need  to  be  maintained  at    16.75%  and  the  five  amendments  specified  in  Scenario 1 can be avoided . This has been worked out on the basis of the projections  provided by the Actuary,  as shown in the Table below:    (All figures are in Rs crore)  Base Deficit  ‐27,040 Corpus generated by raising the co (i.e. due to 17.26% extra contribut ntribution to 16.75%  ion)  2,00,815 Cost of providing 3% annual hike  ‐1,73,688 Net Surplus  87   SCENARIO 6   6      THE SCENARIO WORKED OUT IN THE 3RD MEETING OF   THE SCENARIO WORKED OUT IN THE 3RD MEETING OF   THE EXPERT COMMITTEE ON THE BASIS OF   THE EXPERT COMMITTEE ON THE BASIS OF   WAGE CEILING OF RS. 10,000/­.  WAGE CEILING OF RS. 10,000/­.      This scenario contemplates a package of benefits as follows :    This scenario contemplates a package of benefits as follows :    • increase in wage ceiling from Rs. 6500/- to Rs 10,000/- . • increase in wage ceiling from Rs. 6500/- to Rs 10,000/- . • provision of annual relief of 3% ; and • provision of annual relief of 3% ; and • a minimum Pension of Rs. 1000/- to all categories of pensioners. • a minimum Pension of Rs. 1000/- to all categories of pensioners. Providing these higher package of benefits necessitates increase in rate of contribution which may go upto 18-20%. As this much higher contribution rate is not feasible, the following six modifications would also need to be implemented. Providing these higher package of benefits necessitates increase in rate of contribution which may go upto 18-20%. As this much higher contribution rate is not feasible, the following six modifications would also need to be implemented.     • Pensionable Salary to be calculated as an average of last 3 years of service. • Pensionable Salary to be calculated as an average of last 3 years of service. • Withdrawal option to be deleted • Withdrawal option to be deleted • Bonus of 2 years to be disallowed • Bonus of 2 years to be disallowed • The age of superannuation to be raised from 58 to 60 years; and • The age of superannuation to be raised from 58 to 60 years; and • fr The age for early pension to be raised The age for early pension to be raised om 50 to 55 years • from 50 to 55 years • Nominee Pension to be disallowed.   With the above modifications, the rate of contribution would come down to 14.75% from  8‐20%.  The required rate of contribution in the pension fund shall be met as follows:  • Nominee Pension to be disallowed.   With the above modifications, the rate of contribution would come down to 14.75% from  8‐20%.  The required rate of contribution in the pension fund shall be met as follows:  1   S.No.    S.No.  Establishment  contributing @  Establishment  contributing @  Diversion  from  oyer  ibution  Diversion  from  oyer  ibution  Empl ontr Empl ontr c Government  contribution  Government  contribution  Diversion  from  loyee  tribution Diversion  from  loyee  tribution Emp con Emp con Total  contribution Total  contribution 1.  12%   12%    2.75%  Nil  14.75%  2.  10%  1   0%  2.75%  2%  14.75%  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 32         REPORT OF THE EXPERT COMMITTEE ON EPS,1995 33       Present Values  Rs. in Crores  Rs. in Crores  Base shortfall  27,040         a.  Provision of annual relief of 3%  b. A  minimum  Pension  of  Rs.  1000/‐  to  all  sioners  categories of pen 1,73,688 3,012 1,76,700 Total Requirements  2,03,740 a. Saving due to Pensionable Salary of 3 years.  b. Saving  due  to  deletion  of  Withdrawal  Option.  c. Saving by disallowing bonus of 2 years.  d. Saving  due  to  raising  of  age  of    Superannuation to 60 years.  e. Saving  due  to  raising  the  age  for  Early  Pension.    gs  Total Savin 6,962 6,447 16,123 23,363 8,997     61,892 Net Deficit  1,41,848 5.26% contribution  1,47,299 Surplus after additional contribution  5,451     CHAPTER 8    PROVIDENT FUND­CUM­PENSION ANNUITY SCHEME –   AN ALTERNATIVE    8.1  The  Committee  initially  attempted  to  address  the  challenges  being  faced  by  Employees’  Pension  Scheme,  1995  by  arriving  at  possible  amendments  in  the  existing  Employees’  Pension  Scheme,  1995.    However,    the  Committee  felt  that  a  defined  contributory  scheme  with  elements  of  insurance  shall  be  more  realistic,  equitable,  tain sus able and in line with the emerging trends in social security schemes world over.    8.2 This is a defined contribution scheme with a mix of appropriate insurance with the  following advantages:    8.2.1 This step would be in tune with similar developments in the country and across  the world.   8.2.2 It would ensure individual accounting of the members, thus addressing their long‐ standing  demand  of  transparency  in  pension  fund  accounts  and  commensurate  benefits.  The Committee felt that individual accounting will motivate an individual  member to retain funds in the Scheme till superannuation as the Scheme is not  being pooled together.  It will also provide flexibility to the individual to decide on  t also.  an annuity amount by pooling in funds from the provident accoun blement.  8.2.3 The insurance factor will cover the risk of death and disa  easy to understand   8.2.4 The Scheme will be transparent and 8.2.5 The benefits will be easily portable.  8.2.6 It will also ensure long term sustainability on a firm basis.  Thus it will provide a  sound  platform  for  enlarging  Scheme  by  reducing  the  threshold  from  20  employees to 10 and also for increasing the wage ceiling from time to time.      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 34 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 35 8.3  The  Committee  therefore  attempted  a  draft  of  a  Provident  Fund‐cum‐Pension  Annuity Scheme as follows:‐.    8.3.1    Two  accounts  shall  be  maintained  in  respect  of  each  member:  Provident  Fund  Contribution Account (PFCA) and  Annuity Contribution Account (ACA).    8.3.2  In order to ensure reasonable pension amount as also to increase the EDLI purpose  for larger benefit, the Committee felt that the overall contribution rate be increased  to 14 ll akup : % as per the fo Establishment  contributing  owing bre Diversion  from  er  ution    Government  contribution    S.No.  @   Employ b contri Diversion  from  Employee  tribution  con Total  contribution 1.  12%   11.5%  2.0%  Nil  13.5%  2.  10%  9.5%  2.0%  2%  13.5%  The remaining 0.5% of employer’s share shall be diverted into EDLI Fund.    8.3.3  There shall be a statutory salary limit for coverage under the scheme upon which  the contributions shall be calculated.  To start with, this limit fixed at Rs 10,000/‐  er month.   p   8.3.4 The  member  and  the  employer  shall  be  free  to  contribute  at  salary  beyond  the  statutory limit without the approval of EPFO. However, Government’s contribution  shall be limited to the statutory wage ceiling.    8.3.5  Withdrawals,  disbursements  and  nomination  under  PFCA  shall  be  largely  governed  by  the  provisions  similar  to  those  under  the  present  Employees’  Provident Fund Scheme, 1952. In other words, PFCA shall cater to the Provident  Fund benefit for the members under the Scheme.     8.3.6  The old age regular income benefit to the members shall be provided in the form  of annuity purchased through the accumulations in ACA. This shall be allowed only  at superannuation.    8.3.7  In case of death, the spouse of the member will be entitled to get accumulations in  PFCA and purchase annuity from the accumulations in ACA. In addition, the spouse  will also get a lump sum from EDLI for purchasing annuity.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 36 8.3.8  In case of disability, the member will be entitled to get accumulations in PFCA and  purchase annuity from the accumulations in ACA. In addition, the member will get  the EDLI benefit and add it to the amount for purchasing annuity.    8.3.9 With  diversion  of  0.5%  employer’s  share  into  EDLI  Fund,  the  accumulation  payable  to  spouse/member  in  case  of  death/disablement  will  increase.    It  is  expected that the benefit will atleast become Rs. 2,00,000.  This can be verified by  conducting a valuation of EDLI Fund.     8.3.10 Default by the employer in ACA, if any, to be made good from EDLI Fund to the  extent  possible.  However,  this  would  not  absolve  the  employer  of  the  statutory  obligation to submit the dues under ACA. As and when the amount is recovered,  the same shall be credited to the EDLI Fund with interest & damages received. This  will bolster the shock‐absorbing capacity of the EDLI Fund in case of contingencies  of death and disability.    8.3.11  Pensioners  existing  as  on  cut‐off  date  (say,  01.04.2011)  or  those  eligible  for  pension on or before the cut‐off date shall be compensated by providing a lump‐ sum commensurate with the age and amount of pension of the pensioner. On the  other hand, the existing members shall be compensated by providing the transfer  of accumulations as per Tables E, A & B, as applicable.     8.3.12 As and when the transfer of accumulation shall be done, there is a possibility of  some  balance,  positive  or  negative,  remaining  in  the  fund.    Such  fund  can  be  merged into the EDLI fund from where the insurance element of the scheme shall  e administered.    b   8.3.13  In  case  of  exempted  establishments,  PFCA  accounts  shall  be  maintained  by  the  employer.  Exempted  establishments  can  also  maintain  ACA  accounts,  provided  they pay the Government’s contribution.      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 37 8.3.14  The provisions related to enrollment of members, allotment of account numbers,  deduction  and  payment  of  contributions  and  processing  of  interest  under  PFCA/ACA shall remain same as those in the present EPF Scheme, 1952.     8.3.15  A sample calculation for various annuity scenarios as per Jeevan Akshay Policy of    LIC is as follows.      Value of monthly Annuity:    Age  at  Entry  Wage at  Entry  Period of  Service  Wage  at Exit   Age  at  Exit  Accumula tions in  ACA  A1  A2  A3  A4  20  3500  35  18387 55 2085270 15035 14138 11844  12262 20  3500  40  23467 60 3355981 26143 24163 21075  19901   A1 = Annuity payable for life at a uniform rate.  A2 = Annuity for life with a provision of 50% of the annuity payable to spouse during  his/her lifetime on death of the annuitant.   A3 = Annuity payable for life increasing at a simple rate of 3% p.a.  A4 = Annuity for life with return of purchase price on death of the annuitant.     This is only an illustrative table and the benefits are indicative.        Assumptions:  calation Rate per annum: 5%  (i)  Contribution Rate: 13.5%, Salary Es (ii)  Wage ceiling is increased regularly.  n R (iii)  Interest Earni g  ate during contributory period: 8.5%    8.3.16 The  annuity  at  the  time  of  superannuation/exit  from  the  scheme  would  be   Trustees.  purchased from insurance providers as approved by Central Board of 8.3.17 The Scheme is expected to address the various grievances as follows:    S.No. Grievance  Redressal  1  No  information  to  the  member  l   about  his/her  accumu ations in  Pension Fund.  Due  to  individual  accounting,  complete  C account  statement  of  the  member  in  A A  shall be available.  2  Unrealistic  statutory  limit  on  salary on which contributions can  be made.  Members  and  Employers  shall  be  free  to  decide  their  own  limits  of  upper  contributions without any approval from PF  authorities.  3  Static rates of pension.  The member will have the option to choose  an increasing annuity.      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 38 8.4  After  the  second  meeting  of  the  Committee,  the  members  have  continuously  exchanged views and discussed the matter further through e‐mails. The comments of the  embers on the above concept have been summarized in   Appendix­9.  m   8.5  For  better  appreciation  of  the  concept  a  comparison  of  the  proposed  Provident  Fund‐  cum‐  Pension  Annuity  Scheme  with  the  New  Pension  System  of  Government  of  India (for non‐government employees) is given in Appendix­10.  CHAPTER 9  CHAPTER 9      SUMMARY OF  FINAL RECOMMENDATIONS  SUMMARY OF  FINAL RECOMMENDATIONS      9.1  The  Committee  has  looked  into  the  Employees’  Pension  Scheme,  1995  and  the  expert views have been explained in detail in the earlier chapters.  After contemplating  the detailed analysis provided by the Valuer, the Committee has arrived at the conclusion  hat the final two recommendations be made to the Government i.e.       9.1  The  Committee  has  looked  into  the  Employees’  Pension  Scheme,  1995  and  the  expert views have been explained in detail in the earlier chapters.  After contemplating  the detailed analysis provided by the Valuer, the Committee has arrived at the conclusion  hat the final two recommendations be made to the Government i.e.   t   Recommendation 1:  Introduction of Provident Fund‐cum‐Pension Annuity Scheme; a ecommendation 2:  Modifications in the existing Employees’ Pension Scheme, 1995.  Recommendation 1:  Introduction of Provident Fund‐cum‐Pension Annuity Scheme; a ecommendation 2:  Modifications in the existing Employees’ Pension Scheme, 1995.  nd  nd    R     R     Recommendation 1:  Introduction of Provident Fund­cum­Pension Annuity Scheme ecommendation 1:  Introduction of Provident Fund­cum­Pension Annuity Scheme       9.2  The Committee considered various ways out of the present imbroglio and felt that  the minimum pension level and the statutory wage limit being prescribed would again fall  short of pensioners’ expectations after some years as the real value of the benefits being  envisaged now would come down in future. This would again necessitate the increase in  contributions  in  future.  However,  periodic  increase  in  contributions  may  not  be  forthcoming regularly from the various stakeholders. Hence, such exercises would have  to  be  repeated  in  future  to  find  new  ways  to  meet  the  pensioners’  demands  while  nsuring the sustainability of the Scheme.   e   9.3  The Committee feels that the proposed Provident Fund‐cum‐Annuity Scheme is a  better option to tide over the problems being faced by the Employees' Pension Scheme,  995, as it has the base advantages as elaborated at para 8.2 of Chapter 8:  1   9.4  Hence the Committee, as the first option, would recommend the Provident Fund  cum Pension Annuity Scheme as elaborated at Chapter ‐8.            REPORT OF THE EXPERT COMMITTEE ON EPS,1995 39 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 40       Recommendation 2:    Modifications  in  the  existing  Employees’  Pension  Scheme, 1995     9.5 To continue with the existing Scheme  framework, the Committee considered the  six  Scenario  as  analysed  in  the  earlier  Chapters.  The  committee  further  noted  that  no  increase in  wage  ceiling  is  possible  unless  the  pension  benefits are  calculated  in  parts  separately  for  pensionable  service  in  respective  wage  ceilings  as  and  when  these  are  hanged.   c   9.6  Accordingly,  after  contemplating  the  six  scenarios  worked  out  in Chapter  7, the  Committee recommends that the sixth scenario may be adopted i.e. a package of benefits consisting of : • Increase in wage ceiling from Rs. 6500/- to Rs 10,000/- . • provision of annual relief of 3% ; and • a minimum Pension of Rs. 1000/- to all categories of pensioners. alongwith the following modifications to offset the cost of above benefits as much as possible: • Pensionable Salary to be calculated as an average of last 3 years of service. • Withdrawal option to be deleted • Bonus of 2 years to be disallowed • The age of superannuation to be raised to 60 years; and • to 55 The age for early pension to be raised years • Nominee Pension to be disallowed.   or the above package of benefits the contribution rate required shall be @ 14.75%.  F   9.7  However,  the  Committee  would  again  like  to  emphasize  that  in  order  to  make the scheme sustainable on a long term basis, it shall be better to switch to a  defined  contribution  scheme  as  proposed  in  first  recommendation  i.e.  Provident  Fund­cum­Pension Annuity Scheme.          REPORT OF THE EXPERT COMMITTEE ON EPS,1995 41 9.8  Other Recommendations:       In addition, the Committee would also like to suggest that the quantity and quality  of  data  in  respect  of  EPS  members,  pensioners  and  their  family  must  be  improved  significantly and data collection should be given priority.  An adequate number of data  shall ensure that valuation of the pension fund reveals a true and correct picture and  shall reduce number of  assumptions as far as possible.      9.9  The Committee also recommends that the actuarial valuation of the Fund may be  conducted  after  every  3  years  rather  than  making  it  an  annual  exercise  that  is  urdensome and time consuming.    b       ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐o‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐            REPORT OF THE EXPERT COMMITTEE ON EPS,1995 42       REPORT OF THE EXPERT COMMITTEE ON EPS,1995 43   APPENDIX 1 Minutes of the 1st meeting of the Expert Committee for review of Employees’ Pension Scheme 1995. Date : 01-12-2009 Venue : Mini-Committee Room, Ministry of Labour and Employment, Shram Shakti Bhawan, New Delhi. Time : 11.00 am. The first meeting of the Expert Committee for review of Employees’ Pension Scheme 1995 was held on 01-12-2009 in the Mini-Committee Room of the Ministry of Labour & Employment, Shram Shakti Bhawan, New Delhi. The meeting was chaired by Shri S.K. Srivastava, Addl. Secretary, Ministry of Labour & Employment, Government of India. The following members were present in the meeting: 1. Shri Nirmal Ghosh, Organising Secretary/ INTUC Kolkata, Member. 2. Shri S.P. Subhedar, Retd. MD. LIC of India, Member. 3. Shri Rajesh Bansal, Addl. CPFC, Member Secretary. The following members could not attend the meeting: 1. Shri K. Chandramauli, CPFC 2. Joint Secretary (Social Security), Ministry of Labour & Employment 3. Shri Nalin Thakor, member 4. Shri Bhudev Chatterjee, Member 5. Dr. R. Kannan, Member 6. Shri J.P. Chowdhary, Member 7. Shri K.C. Mishra, Member Following officers from Ministry of Labour & Employment and Employees’ Provident Fund Organization were also present:- 1. Shri S.D. Xavier, Under Secretary, Ministry of Labour & Employment. 2. Shri P.U. Kulkarni, RPFC-I (Pension) 3. Shri Vikram Angurala, RPFC-II (Pension) 4. Shri Vineet Gupta, RPFC-II (Actuarial) REPORT OF THE EXPERT COMMITTEE ON EPS,1995 44 2. The Chairman welcomed the members of the Committee and requested the officers to introduce themselves to the committee members. He appreciated the background papers circulated for the meeting and requested the members to tender their expert views on the problems being faced by the EPS. 3. The Chairman said that the benefits under EPS did not match up to the level of prevailing Consumer Price Index and yet the Actuarial Deficit was constantly increasing. He called for practical measures within reasonable boundaries to address the various problems being faced under EPS, 1995. 4. Shri S.P. Subhedar said that the two advantages of EPS from the point of view of financial viability were that the pension was not index linked & that the past service prior to 16-11-1995 was not a strain upon the scheme. 5. Shri Subhedar also said that the responsibility for Acturial Deficit should be fixed – whether it was low rate of contribution or the generous nature of benefits or the low rate of returns that was causing the deficit. He suggested that a roadmap for the adjustment of contributions and benefits could be laid down. 6. The Chairman said that our basic concern should be to make EPS self sustainable and one of the measures was through rationalization of benefits. He suggested that the portfolio of benefits could be rationalized in such a manner that the benefits are viable. At the same time, he stressed the need to increase the corpus of the Fund. He also observed that the rate of return being generated by the investment of Pension Fund was satisfactory. 7. Shri Nirmal Ghosh agreed with the need to curb the Actuarial Deficit. He suggested that the benefits should not be rationalized further. Instead, the Central Govt. should raise its contribution. He asked that if Govt. could give fifty thousand crores for NREGA, why could it not support EPS by a few thousand crores? He said that India being a socialist state, a minimum pension according to Govt. standards should be fixed to provide a life support to the husband and wife. He cited the example of international standards in this regard. Reacting to REPORT OF THE EXPERT COMMITTEE ON EPS,1995 45 this the Chairman said that most of the pension schemes in Europe were under severe financial stress. 8. Shri S.P. Subhedar said that the maximum of 50% pension in government comes from a contribution rate of around 22%. Hence, a contribution rate of mere 9.49% can’t meet the expectations of bringing the pension under EPS at par with Govt. rates. 9. After listening to various other observations and in consultation with the members, the Chairman directed that the surplus or deficit under following scenarios should be worked out by the Consultant Actuary of EPFO for further consideration by the expert members of the Committee:- Scene EMPLOYER (%) EMPLOYEE (%) GOVERNMENT (%) Total (%) 1 10.33 - 1.16 11.49 2 10.33 - 2.5 12.83 3 10.33 2 2.5 14.83 4 12.33 2 4 18.33 10. Shri S.P. Subhedar suggested that the following additional scenarios should also be worked out simultaneously: (a) Scrapping the provision of granting 2 years weightage to those whose pensionable service is more than 20 years. (b) Increasing the vesting age from 58 to 60 years. (c) Calculating the pensionable salary from the average of last 36 months instead of 12 months. 11. The Chairman agreed with the suggestion and directed that each of the scenario should be worked out separately. 12. Concluding the discussion, the Chairman invited further suggestions from the members through post or e-mail so that the report could be finalized at an early date. The meeting ended with a vote of thanks to the Chair. ********** REPORT OF THE EXPERT COMMITTEE ON EPS,1995 46 APPENDIX – 2    Minutes of the 2nd Meeting of the Expert Committee for Review of the Employees' Pension Scheme, 1995 The second meeting of the Expert Committee on Review of Employees' Pension Scheme, 1995 was held at 11 A.M. on 02.02.2010 in the Mini-Committee Room of the Ministry of Labour & Employment, Shram Shakti Bhawan, New Delhi. The meeting was chaired by Shri S.K. Srivastava Additional Secretary, Ministry of Labour & Employment, Government of India. The following members were present in the meeting: Sh. Nirmal Ghosh, Member (Organising Secretary/INTUC, Kolkata and Member, Central Board of Trustees, EPF) Sh. S.P. Subhedar, Member (Actuary and Retd. Managing Director, LIC of India) Sh. K.C. Mishra, Member (Director & CEO, Lal Bahadur Shastri Institute of Management, New Delhi) Sh. Nalin Thakor, Member (President, Social Security Research Centre, Ahmedabad) Sh. Rajesh Bansal, Member Secretary (Addl. Central Provident Fund Commissioner, EPFO) The following members could not attend the meeting: Sh. Uday Kumar Verma, Member (Central Provident Fund Commissioner) Joint Secretary (Social Security), Ministry of Labour & Employment, Member Sh. J.P. Chowdhary, Member (Member, Central Board of Trustees, EPF) Sh. Bhudev Chatterjee, Member (Independent Actuary) Dr. R. Kannan, Member (Member Actuary, IRDA) Following officers from Ministry of Labour & Employment and Employees’ Provident Fund Organisation were also present: Shri S.K. Verma, Director (SS), Ministry of Labour & Employment Shri S.D. Xavier, Under Secretary, Ministry of Labour & Employment Shri P.U. Kulkarni, RPFC-I (Pension) Shri Vineet Gupta, RPFC-II (Actuarial) 2. The Chairman welcomed the members and thanked them for sparing time to tender their valuable suggestions. He regretted the absence of Sh. Bhudev Chatterjee and other members. Thereafter, he asked Addl. CPFC (Pension) to take up the items for discussion. ITEM 1: CONFIRMATION OF MINUTES OF THE 1ST MEETING HELD ON 01.12.2009 Shri Nirmal Ghosh submitted his comments on the minutes of the first meeting. The Committee approved to include the comments of Sh. S.P.Subhedar, Sh. Bhudev Chatterjee and Sh. Nirmal Ghosh in the minutes. The draft minutes of the first meeting of the Expert Committee were accordingly confirmed. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 47 ITEM 2: SUGGESTIONS RECEIVED FROM THE MEMBERS OF THE EXPERT COMMITTEE Initiating the discussion on the item, Sh. S.P. Subhedar said that the item was well prepared and presented, particularly the Annexure-5. Further, referring to the 9th-10th combined Valuation Report on EPS'95, he said that discussing the findings and suggestions of an actuarial valuation carried out on about 4% of member data would not serve much purpose. He also pointed out that the design, if any, of the sample used for Valuation should have been specified. 2.2 The Chairman shared the concern of the member and regretted the data constraints. He directed that in view of the special exercise undertaken by EPFO, the quantity and quality of data should improve substantially this time. The following observations were made by the members regarding the Valuation process in general and the 9th-10th combined Valuation Report of EPS'95 in particular: 2.3 The average salary of Rs 2789 stated in the 9th-10th combined Valuation Report did not seem to be consistent with the salary distribution given in Appendix A & B of the Report. 2.4 The gap between the salary growth rate and the interest rate is a crucial factor for Valuation and the basis for arriving at their assumptions should be spelt out in detail. The salary growth rate could be higher than stated in the 9th-10th combined Valuation Report in view of the Indian economic prospects. 2.5 There should be a consensus in the assumption of parameter values and the authority to decide the same should also be fixed. However, another view was that a Valuing Actuary cannot be forced to use the assumptions given by his client and that the Valuer should have professional freedom in arriving at his assumptions. 2.6 Statistical regression model should be used in arriving at these values. 2.7 The Chairman agreed with the views of the members and said that the methodology used in arriving at these assumptions should be fully specified. He advised the members to submit their queries about the 9th-10th combined Valuation Report and asked Addl. CPFC (Pension) to get back with the replies from the Valuing Actuary. 2.8 Shri Nirmal Ghosh said that the rationalization of benefits had two aspects: stopping the benefit altogether and alteration in scale of benefits. He observed that the latter should be adhered to as far as possible. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 48 2.9 The Chairman said that the Committee would look into the rationalisation of benefits in an overall framework, while giving preference to the subscribers in the relatively lower income brackets. Thereafter, the Chairman requested the members to discuss the suggestions at Item No.3 of the Agenda. ITEM 3: SUGGESTIONS TO AMEND EMPLOYEES’ PENSION SCHEME, 1995 TO MEET THE DEMANDS OF THE SUBSCRIBERS AND TO KEEP THE SCHEME VIABLE IN THE LONG RUN. Suggestion 1: Delete provision to para-11(3) for disallowing contribution over statutory limit without government's share of contribution. and Suggestion 2: Introduce sub-para 11(4) for voluntary contribution over the statutory limit. 3.1.1 Introducing the item Addl. CPFC (Pension) said that according to the existing provisions voluntary contribution to EPS'95 over the statutory limit (presently Rs 6500/-) is allowed with the consent of the employee and the employer, but the government contribution of 1.16% is restricted to the statutory limit. Hence, voluntary contribution over the statutory limit is deficient by 1.16%. This results in lower income members cross-subsidizing the pension of higher income members. In order to remove this anomaly, provision should be made to obtain 1.16% contribution over that part of the salary which exceeds the statutory limit. He explained that Suggestion 1 is meant to remove the existing provision and Suggestion 2 seeks to bring in the new provision. He also pointed out that the proviso to para-3(2) of the Scheme was in contradiction with proviso to para-11(3) and that an amendment in the form of deletion of the words “the employer and” was required in proviso to para-3(2) of EPS'95. 3.1.2 The members, while supporting the suggestions, asked if the existing members would be allowed to continue under the existing provision even after the date of amendment. Addl. CPFC (Pension) replied that the members currently contributing on higher salary would not be allowed to contribute on higher salary from the date of amendment. However, the benefits accruing to them till the date of amendment can be quantified and frozen for release at the time of exit. The Chairman, too, ensured that the amendment would not apply from retrospective date. He further stated that the suggestion should be accepted as it would stop the cross- subsidization to the upper income groups at the cost of lower income groups. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 49 3.1.3 Sh. Nirmal Ghosh said that he supported the proposal as it was in favour of lower class members. However, he advised that the proposal should also be placed before the CBT (EPF). 3.2.1 With these discussions the Committee approved the proposals specifying that the member should be given the option to authorize the employer to divert 1.16% extra from employer’s contribution, so that the total diversion from employer's contribution to EPS Fund is 9.49% and to EPF is 2.51% in case of voluntary contribution over the statutory limit. The suggested amendment of deleting the words “the employer and” in proviso to para-3(2) shall also be carried out simultaneously. Suggestion 3: Amending para-11(1) for determination of pensionable salary 3.3.1 The Chairman desired to know the international practice in this regard. The members stated that the general norm was 36 months. It was suggested that the actuarial impact of the proposal could be calculated for a new entrant aged around 20. The Committee approved the proposal for 36 months while agreeing to study its actuarial impact. Suggestion 4: Amend para-10(2) to disallow the bonus of two years in pensionable service 3.4.1 The Chairman enquired if the erstwhile FPS’71 had the provision of providing two- year bonus in pensionable service. RPFC (Pension) replied that it was not there in FPS’71 and even in EPS'95 the provision would come into effect not earlier than 2015. The Chairman further enquired if the proposed amendment would make a substantial impact. Sh. S.P. Subhedar, Actuary, replied that it would make a substantial financial impact. 3.4.2 In response to an apprehension that withdrawing the provision might act as a disincentive for staying in membership, it was stated that the rule increases pension by over 2.857% of pensionable salary and increases the cost for no rational reason. Unearned service credit and conservative vesting right was justified to contain turnover and/or reward long service. However, studies show that conservative vesting rights help retain mediocre. Moreover, the reasoning can not apply to a legislated plan covering thousands of units with portability. Hence, it was very appropriate to discontinue unearned service credit procedure at the earliest. 3.4.3 The Chairman suggested that the proposal should be got actuarially assessed before taking the final decision. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 50 Suggestion 5: Amend para-2:1(ix) & para-12 of EPS'95 to increase the pensionable age from 58 to 60 3.5.1 The members supported the proposal saying that it was worth implementing in view of the increasing life expectancy because the contributory period would increase while the benefit period would decrease. However, a doubt was raised that implementing the suggestion would pose problems in establishments where the retirement age was less than sixty. Responding to this the Chairman said that such employees could either wait for two years before claiming pension or they could opt for early pension at age 58. 3.5.2 The members further observed that in establishments where the superannuation age is more than the superannuation age under EPS'95, the pension should commence from the later of such dates so that the employee does not receive pension along with the regular salary. They also pointed out that the trade unions have earlier fought for higher retirement age. Hence they should not oppose it here. Instead, they can persuade the various employers to increase the normal retirement age of their employees to sixty years. With these deliberations the Committee approved the proposal of increasing the pensionable age from 58 to 60 years under EPS'95. Suggestion 6: Amend para-14 to discontinue the option of withdrawal benefit. 3.6.1 Addl. CPFC (Pension) said that the Preamble of the Legislation in the form of EPF & MP Act, 1952 has been thoroughly defeated due to the provision of option of withdrawal benefit in EPS'95. He said that of all the pension claims settled in a year, over 80% pertain to early withdrawal – thereby defeating the purpose of providing regular old age income. In order to provide a worthwhile old age income, there is an urgent need to carry out the proposed amendment. 3.6.2 The Chairman desired to know the fate of the members who would leave service before putting in ten years of service. Addl. CPFC (Pension) replied that such members are issued “Scheme Certificate” containing all the service details at the time of leaving service and they can come back and join any time before the age of superannuation. However, we would have to work out the modalities for people who would superannuate before putting in ten years of service. 3.6.3 The Chairman expressed apprehension that disallowing the withdrawal option would amount to denying a contingency help to the members when they are in financial straits. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 51 Addl. CPFC (Pension) replied that this need was taken care of by the provisions of withdrawal available in Provident Fund Scheme and that the early withdrawals from Pension Scheme are primarily against the philosophy of strengthening the “pool” of a Pension Fund so as to increase its shock-absorbing capacity. 3.6.4 The members supported the proposal saying that the provision of withdrawal increases the cost of a family pension plan. It is not justified also because EPS'95 provides pension for life to surviving spouse of a member/pensioner – a benefit the spouse would be robbed off if the member withdraws from the Scheme. They said that the proposed amendment is long overdue and early action will help contain the Pension Fund deficit. The Committee thus approved the proposal of disallowing the option of early withdrawal from EPS'95. Suggestion 7: Delete para-16:5(a) to discontinue the provision of Nominee Pension 3.7.1 At the outset the Chairman desired to have an estimate of nominee pensioners. RPFC (Pension) replied that about 8000 out of 32 lakh beneficiaries in 2008-09 were nominee pensioners. The Chairman observed that such a small number would not affect the Pension Fund too adversely. However, the members said that financial impact should not be a determinant if the Defined Benefit structure of the Scheme is to be retained. 3.7.2 The Chairman enquired if Nominee Pension outside family was available in government pension rules. RPFC (Pension) replied that nomination under government pension rules is allowed only to family members. 3.7.3 One of the members observed that the contribution of a member would go in vain if the facility of nomination outside family was withdrawn. Addl. CPFC (Pension) replied that one of the basic concepts of any Pension Scheme is the "Pooling of Risk" whereby the members share the risk of each other's death or disability. Hence, there was nothing wrong if a member dies without any family and his contribution is used to fund the pension of fellow members. With these discussions the Committee approved the proposal for discontinuing the provision of Nominee Pension outside family. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 52 Suggestion 8: Amend para-16:3(c) to reduce the number and maximum age for children pension 3.8.1 One of the members suggested that only the age should be restricted and not the number. However, after discussing the various aspects of the proposal the Committee decided that the existing provision should be continued and accordingly rejected the proposal. Suggestion 9: Amend para-12(7) to disallow early pension before 55 years of age. 3.9.1 Addl. CPFC (Pension) observed that pension was essentially an old age security benefit and allowing it before superannuation amounted to ignoring this vital aspect of a pension scheme. He also said that the design of any pension scheme is such that the benefits accruing to the members compound in the closing years of their service. However, members are often ignorant of this fact and they settle at a lower amount of pension by opting early. Hence, the option for early pension should not be allowed. However, keeping in mind the myriad of industries catered to by EPS'95 and the varying ages of retirement in such establishments, option for early pension after age 55 should be allowed. 3.9.2 The members also suggested the proposal saying that if the superannuation age is increased to sixty years then the eligibility for other provisions such as early pension should also move up. With these discussions the Committee approved the proposal of raising the age for early pension from 50 to 55 years. Suggestion 10: Merger of EDLI Scheme in EPS'95. 3.10.1 Addl. CPFC (Pension) said that the Valuing Actuary for EDLI has recommended the merger of the Employees’ Deposit Linked Insurance Scheme’76 with EPS'95, saying that with the present level of EDLI benefit, the merger would go a long way to mitigate the deficit in the Pension Fund. 3.10.2 A member suggested that the present benefit under EDLI Scheme should be scrapped. Instead, the quantum of benefit of the total disability pension should be increased. However, the Committee approved the proposal as proposed in the agenda. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 53 Suggestion 11: Amend para-3(2) of EPS'95 and para-2:f(ii) of EPF Scheme'52 to increase the statutory wage ceiling from Rs 6500/- to Rs 15,000/- 3.11.1 Introducing the proposal the Chairman said that a correction in the statutory wage ceiling is long overdue as the last amendment of increasing the wage ceiling from Rs 5000/- to Rs 6500/- was carried out in 2001. The economic conditions since then have changed substantially and the amount of pension with above wage ceiling is often meager. Wage ceilings in similar organizations such as the Employees' State Insurance Corporation have been revised from time to time. The Chairman also suggested that in addition to the proposed limit of Rs. fifteen thousand, the proposal for Rs. ten thousand should also be assessed actuarially. The Committee agreed to have an actuarial assessment of both the wage ceilings, ie Rs 10,000/- as well as 15,000/-. Keeping in consideration the various amendments which have been approved in the present meeting since the entire issue has to be taken as a total package. Suggestion 12: Amend para-3(1) to increase the rate of contribution under the Scheme to 13.16%. Provide an annual hike of 3% in the pension amount being received by the beneficiary. 3.12.1 The members observed that providing an inbuilt indexation of benefits could have a serious impact on the Pension Fund. They suggested that instead of providing an annual hike we should provide an increased minimum pension. The Committee agreed and suggested that the actuarial impact of providing a minimum pension of seven hundred rupees per month should be studied. The Committee agreed to study the actuarial impact of providing a minimum pension of Rs 700/- per month. Suggestion 13: Amend para-32 of EPS'95 regarding annual actuarial valuation of EPS'95 3.13.1 Addl. CPFC (Pension) said that the exercise of actuarial valuation is a strenuous task as it involves collection of data from all the field offices spread across the country. The exercise invariably spills over to next year thereby causing delay in the subsequent year’s valuation. Often, therefore, several valuations are commissioned together. He suggested that to make the exercise more practical and meaningful, the actuarial valuations should be carried out every five years. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 54 3.13.2 The Chairman observed that the exercise of annual valuation is lagging behind by more than three years and it would be more appropriate to have the valuation every three years. He cited the example of Employees' State Insurance Corporation where a similar amendment has been made to provide for actuarial valuation every three years. The Committee agreed approved the proposal accordingly. 3.1 Summing up the discussion on the item, the Chairman urged the members that they should support the suggestions keeping in mind that at primarily benefits the lower earning segment of workers covered by the Employees' Pension Scheme, 1995 and with a view to provide larger benefits for the larger whole. Committee further desired that the impact of all the above suggestions should be assessed actuarially. In addition, the following observations were made by the members: 3.2 While conducting such actuarial studies EPFO should take help of ILO and other bodies of international repute. 3.3 In response to a suggestion that help could be taken from LIC or the Institute of Actuaries of India (IoA), it was stated that while the LIC did not have the necessary expertise, the IoA may not certify such studies, particularly with such poor data. Hence, EPFO should take steps for improvement of data. An apprehension was expressed that the relief provided in the past was possibly ill-conceived due to poor quality of data. ITEM 4: COMPENSATING A MEMBER FOR DELAYED PAYMENT OF PENSION. 4.1 Introducing the item the Addl. CPFC (Pension) informed that the existing manual provisions state that the pension for a particular month should be credited to the beneficiaries’ account within the first week of the following month. It is suggested that in case the pension for a particular month is not credited within the stipulated period, EPFO should pay interest on such period of delay. He further suggested that the rate of interest can be one percent less than the prevailing rate of interest declared by the Government under EPF Scheme’52 during the corresponding period. 4.2 A point in question was whether the reckoning of the date of delay should be from the date of entitlement of pension i.e. attaining 58 years of age or from the date of submission of pension claim by the member. It was suggested that even if the member makes a delay in REPORT OF THE EXPERT COMMITTEE ON EPS,1995 55 presenting his claim for the pension, the compensation should be granted from the date of entitlement. The Committee discussed the proposal and approved that the rate of interest to be given on delayed payment of pension shall be one percent less than the prevailing rate of interest declared by the Government under Employees' Provident Funds Scheme, 1952 during the corresponding period. 5. In the end, Chairman requested all the members to give any other suggestions over and above the proposals which have been considered and decided upon in the present meeting. The same can also be sent by e-mail (latest by 15th March, 2010). The meeting ended with a vote of thanks to the Chair. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 56 APPENDIX­3  Draft Minutes of the 3rd Meeting of the Expert Committee on Review of the Employees' Pension Scheme, 1995 The third meeting of the Expert Committee on Employees' Pension Scheme, 1995 was held at 11.30 A.M. on 23.07.2010 in the chamber of Sh. S.K. Srivastava, Addl. Secretary & Chairman of the Expert Committee, Ministry of Labour & Employment, Shram Shakti Bhawan, New Delhi. The members present in the meeting were as per list enclosed. The following members intimated their inability to attend the meeting: Sh. J.P. Chowdhary, Member (Member, Central Board of Trustees, EPF) Dr. R. Kannan, Member (Member Actuary, IRDA) Sh. Nalin Thakor, Member (President, Social Security Research Centre, Ahmedabad) The following members could not attend the meeting: Sh. Samirendra Chatterjee, Member (Central Provident Fund Commissioner) Sh. Bhudev Chatterjee, Member (Independent Actuary) 2. The Chairman welcomed the members and stated that the objective of the meeting was to finalise the draft report after taking into account the suggestions received from the members. Thereafter, he asked Member Secretary to take up the items for discussion. ITEM 1: CONFIRMATION OF MINUTES OF THE 2nd MEETING HELD ON 02.02.2010 The draft minutes of the second meeting of the Expert Committee were confirmed after consideration of members’ comments. ITEM 2: Draft Report of the Expert Committee on Employees’ Pension Scheme, 1995. & ITEM 3: Examining the expectations/suggestions received. The revised draft report prepared after taking into account the proceedings of the first and second meetings of the Expert Committee, the discussions among the members via e- mail and Actuary’s report was placed before the Expert Committee for their consideration and approval. Initiating the discussion, the Chairman stated that the decision of the Committee to assess the actuarial impact of the proposals approved and/or considered, has ensured that the REPORT OF THE EXPERT COMMITTEE ON EPS,1995 57 draft report is reliable as well as is definite and concise in its recommendations. He invited the members to suggest modifications in the draft report so that the final report be in accordance with the mandate given to the Committee. He pointed out that the members may suggest inclusion of further scenarios in the draft report. He informed the members that in order to discuss the contents of draft report thread-bare, a Power point presentation has been prepared. The Member Secretary gave the presentation bringing out the major observations, findings and recommendations contained in the draft report. He explained the various scenarios which have been worked out with a view to provide a number of alternatives so that a final recommendation may be made by the Expert Committee. Dr. K.C. Mishra remarked that rise in contribution rate while retaining the present set of benefits will be a cross subsidization from future generation to present generation of pensioners. He also shared the case of General Motors which was running a defined benefit scheme and having accumulated 20 billion dollar deficit have to declare itself insolvent. Sh. Nirmal Ghosh stated that the proposed Provident Fund-cum-Pension Annuity Scheme can be considered by the workers and workers unions only if there be some minimum pension. In addition, the wage ceiling may be increased to atleast Rs. 10,000 per month and the EPF & MP Act, 1952 may be made applicable to the establishments employing 10 or more employees. After detailed discussions on the two main alternatives i.e. amendments in the Employees’ Pension Scheme, 1995 viz-a-viz its replacement with new Provident Fund-cum- Pension Annuity Scheme, it was decided that the Committee shall recommend Provident Fund- cum-Pension Annuity Scheme as its first recommendation. In order to provide a reasonable annuity upon superannuation, the Committee decided that in the proposed Provident Fund-cum-Pension Annuity Scheme, total rate of contribution should be at least 13.5%. Out of 13.5%, the 11.5% shall be diverted from the employer’s share of contribution and 2% shall be contributed by the Central Government. However, in cases where the rate of contribution is 10% each from employer and employee, the diversion from employer’s share would be 9.5%, and employee’s share would be 2%, making a total of 11.5%. The remaining 0.5% of the employer share shall be diverted to EDLI from REPORT OF THE EXPERT COMMITTEE ON EPS,1995 58 where the accumulation for providing insurance in case of death and disablement are to be provided. The Committee felt that by providing insurance in case of death and disablement, the proposed scheme is an improvement over New Pension Scheme. The proposed scheme is also transparent, easy to understand and every member will get full benefit out of his contributions. This will also ensure that in synchronization with the wage-trends, the wage ceiling may automatically escalate ensuring that the contributions and corresponding benefits may also increase. Most important of all, it will ensure easy portability of benefits. Sh. S.P. Subhedar stated that though the amendments in existing scheme may make the scheme attractive and viable for few years, further amendments shall be required again after few years and the contribution rate will have to be enhanced further. He felt that the best solution may be to go with the proposed PF-cum-Pension Annuity Scheme. He added that the Committee can not suggest a minimum pension for the proposed PF-cum-Pension Annuity Scheme. As it is neither feasible nor practical. He gave certain suggestions to add to the draft report of the Expert Committee relating to the sample data based upon which the actuarial projections have been made. It was also decided that in case Central Board of Trustees does not favour the new scheme and decides to continue with the existing defined benefit scheme i.e. Employees’ Pension Scheme, 1995, the other recommendation of modifying the existing Employees’ Pension Scheme, 1995 may be submitted as second recommendation. The modifications in the existing scheme have been proposed keeping in view the three main demands of the existing pensioners and member: • increase wage ceiling from Rs. 6500/- to Rs 10,000/- . • provision of annual relief of 3%; and • a minimum Pension of Rs. 1000/- to all categories of pensioners. Providing these higher benefits necessitates increase in rate of contribution which may go upto 18-20%. As this much higher rate appears not feasible, the following six modifications would also need to be implemented. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 59 • Pensionable Salary to be calculated as an average of last 3 years of service. • Withdrawal option to be deleted • Bonus of 2 years to be disallowed • The age of superannuation to be raised to 60 years • t The age for early pension to be raised • Nominee Pension to be disallowed. o 55 years It was informed by Actuary that the rate of contribution for the above benefits package should be 14.75%. It was agreed that out of the required rate of 14.75%, 12% may be met by diverting 12% employer share in Pension Fund. However, in cases where the rate of contribution is 10% each from employer and employee, the diversion of employer’s share would be 10% and employee’s share would be 2% making total of 12%. The Central Government may contribute remaining 2.75%. The members accordingly finalised the above two recommendations for inclusion in the draft report. It was decided that as the content of the report has been finalised, the report should be submitted to the central government as early as possible. The meeting ended with a vote of thanks to the Chair. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 60 LIST OF MEMBERS/OFFICERS WHO ATTENDED THE MEETING OF THE EXPERT COMMITTEE ON EMPLOYEES’ PENSION SCHEME, 1995 HELD ON 23.07.2010 S.No. Name of the Member of the Committee 1. Sh. Nirmal Ghosh, Member (Organising Secretary/INTUC, Kolkata and Member, Central Board of Trustees, EPF) 2. Sh. S.P. Subhedar, Member (Actuary and Retd. Managing Director, LIC of India) 3. Dr. K.C. Mishra, Member (Director & CEO, Lal Bahadur Shastri Institute of Management, New Delhi) 4. Sh. Rajesh Bansal, Member Secretary (Addl. Central Provident Fund Commissioner, EPFO) 5. Joint Secretary (Social Security), Ministry of Labour & Employment, Member, represented by Sh. S.K. Verma, Director (Social Security), Ministry of Labour & Employment   OFFICERS FROM EMPLOYEES’PROVIDENT FUND ORGANISATION  1. Shri P.U. Kulkarni, RPFC-I (Pension) 2. Smt. Aprajita Jaggi, RPFC-II (Actuarial) 3. Shri Vineet Gupta, RPFC-II Sh. Jayesh Pandit, Actuary attended the meeting as special invitee on behalf of M/s. K.A. Pandit, Consultant and Actuaries. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 61 APPENDIX­4      Chronology of the changes in Wage Limits for the purpose of contributions to be  made under the Schemes in EPF&MP Act, 1952      Period   Wage limit per month     01.11.1952 to 31.05.1957   Rs. 300/‐     01.06.1957 to 30.12.1962   Rs. 500/‐     31.12.1962 to 10.12.1976   Rs. 1,000/‐     11.12.1976 to 31.08.1985   Rs. 1,600/‐     01.09.1985 to 31.10.1990   Rs. 2,500/‐     01.11.1990 to 30.09.1994   Rs. 3,500/‐     01.10.1994 to 31.05.2001   Rs. 5,000/‐     01‐06‐2001 onwards   R   s. 6,500/‐   APPENDIX­5      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 62 APPENDIX­6    Analysis of Outgoing Payments    • Payments under EPS’95 can be classified into two broad categories:   (i) Monthly Pension Payments (including Commutation & RoC).  (ii) Early Withdrawal Payments.  • As can be seen, more than 1/3rd of what goes out from Pension Fund is  withdrawn prematurely.            65.6% 34.4% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Pension Withdrawals                                 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 63     • We saw above that of the Total Pension Payments, 66% goes in the form of  pension. Its category‐wise break‐up is shown above.  • We see that Early Member Pensioners account for 40% of the pensioners and  37% of the payments.                   0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% Early Mbr Mbr Spouse Superan Mbr Mbr Child Orphan Pensnr Spouse Parent Pensnr Child Number Payment                       REPORT OF THE EXPERT COMMITTEE ON EPS,1995 64 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 65 APPENDIX – 7    Report of the Valuer on various proposals under consideration of the Committee @ 8% : Sr.  No.  Proposed Amendment to Employees' Pension Scheme, 1995 is only for future service Impact on the Pension Fund when compared to the present status (when Statutory Wage ceiling is Enhancement for future service only) Rs. 6,500 Rs. 10,000 Rs. 15,000    Base shortfall 12,822 27,040 69,834    The below figures are increase/(decrease) in shortfall 1.  Delete Provision Para- 11 (3) of EPS' 95 : (15.08) (5.56) (2.63) There should be no option to contribute beyond the statutory wage ceiling as the Scheme is primarily targeted at the lower income group. Government contribution is limited to 1.16% of the statutory limit. This gap in contribution remains un bridged and the loss is made up through cross-subsidy by the members with relatively low salary levels. 2.  Introduce Sub-para-11(4) of EPS'95 : (Note -1) (Note -1) (Note -1) If benefit is enhanced from Future 174,068.00 For voluntary contribution over the statutory wage ceiling: Contributions over the statutory limit can be allowed provided the employee and the employer agree to contribute for the salary exceeding the statutory limit, including the 1.16% contribution that does not come from the government in such cases. 174,068.00 159,850.50 117,056.50 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 66 3. Amend Para-11(1) of EPS'95 (5,186) (6,962) (8,774) For determination of pensionable salary to increase the period of average monthly pay drawn from 12 months to 36 months. 4. Amend Para-10(2) of EPS'95 (14,926) (16,123) (20,178) To disallow the bonus of two years in pensionable service by deleting the option of granting 2 years bonus upon completion of 20 or more years of service. 5. Amend Para-2:1(ix) & Para-12 of EPS'95 (18,250) (23,363) (27,076) To increase the pensionable age from 58 to 60. 6. Amend Para-14 of EPS'95 (5,967) (6,447) (6,776) To discontinue the option of withdrawal benefit for less than ten years of service, except at superannuation. 7. Delete Para-16:5(a) of EPS'95 Negligible Negligible Negligible To disallow nominee pension. (Note -2) (Note -2) (Note -2) 8. Amend para-12(7) (6,822) (8,997) (12,028) To disallow early pension option before 55 years of age. 9. Merge the Employees' Deposit Linked Insurance Scheme, 1976 in to the Employees' Pension Scheme, 1995. The merger will result in the following benefits: Note -3 (i) The employer contribution of 0.5% received under the EDLI Scheme will be credited to EPS'95, thereby raising its level of funding. (ii) The current surplus in the EDLI Fund and the future surplus, if any, will bolster the stability of the Pension Fund. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 67 (iii) The administration charge of 0.01% and inspection charge of 0.005% paid by the employer will be discontinued. 10 Provide a minimum members pension of Rs. 1000 to all. 3,012 3,012 3,012 11 Valuation of different contribution enhancement options as follows: Note-4 Addition to normal contribution 2.00 2.00 2.00 Option 1: 44,308 55,321 63,377 Addition to normal contribution 3.34 3.34 3.34 Option 2: 73,994 92,386 105,840 5.34 5.34 5.34 Option 3: 118,302 147,707 169,217 7.34 7.34 7.34 Option 4: 162,610 203,028 232,594 10.84 10.84 10.84 Option 5: 240,149 299,840 343,503 12 Provide for at least one year contribution instead of one month. In cases where less than one year service is rendered before death of the member, the contribution may be returned with interest (declared under Employees' Provident Fund Scheme for that year). 1.01 1.01 1.01 13 What will be the financial implication of introducing the provision of giving a pension rise of 3% (compounded) per annum to all pensioners 98,653 173,688 227,616 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 68 14 What will be the financial implication of restoring back the Commutation Option as per erstwhile para-12A of EPS'95 Note 5 Note 5 Note 5 15 What will be the financial implication of restoring back the Return of Captial Option as per erstwhile para-13 of EPS'95 64,697 99,223 148,520 16 What will be the financial implication of decreasing the Early Pension Reduction Factor to 3% (presently 4%) under para-12(7) of EPS'95 10,144 14,033 17,399 17 What will be the financial implication of restricting Children Pension to only 1 child at a time and that too upto only 21 years of age? (presently children pension can be given to 2 children at a time and upto 25 years of age) (769) (1,082) (1,397)             Note :                 1) It is assumed that all will contribute on last drawn salary without ceiling and will get benefit on that salary   2) Since the data in respect of the employee who have nominated other then their family as a beneficiary is not available and the number of such cases are assumed to be few the effect is not given.   3) As the EDLI is valued separately the surplus of the EDLI will get transferred to EPS 1995 fund.   4) Effect is the additional contribution being generated and not related to shortfall   5) Since the commutation is the present value of future pension the impact on the liability is nil as the commutation will happen from the present vale only   6) We feel that by freezing the past service there will be loss to some section of employees who are going to receive the benefit for salary less than 6500 pm and it may be administratively hampering to maintain records     REPORT OF THE EXPERT COMMITTEE ON EPS,1995 69 APPENDIX – 8    Report of the Valuer on various proposals under consideration of the Committee @7.5%: Sr. No. Proposed Amendment to Employees' Pension Scheme, 1995 is only for future service impact on the Pension Fund when compared to the present status (when Statutory wage ceiling is Enhancement for future service only) Rs. 6,500 Rs. 10,000 Rs. 15,000    Base shortfall                     21,938                      34,048                        79,009      The below figures are increase/(decrease) in shortfall          1.  Delete Provision Para- 11 (3) of EPS' 95 :                     (16)                     (6)                       (3)  There should be no option to contribute beyond the statutory wage ceiling as the Scheme is primarily targeted at the lower income group. Government contribution is limited to 1.16% of the statutory limit. This gap in contribution remains un bridged and the loss is made up through cross-subsidy by the members with relatively low salary levels. 2.  Introduce Sub-para-11(4) of EPS'95 : (Note -1) (Note -1) (Note -1) If benefit is enhanced from Future 183,035.00 For voluntary contribution over the statutory wage ceiling: Contributions over the statutory limit can be allowed provided the employee and the employer agree to contribute for the salary exceeding the statutory limit, including the 1.16% contribution that does not come from the government in such cases. 183,035.00 170,924.75 125,964.25 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 70 3. Amend Para-11(1) of EPS'95 (3,888) (4,640) (5,601) For determination of pensionable salary to increase the period of average monthly pay drawn from 12 months to 36 months. 4. Amend Para-10(2) of EPS'95 (12,620) (14,760) (18,315) To disallow the bonus of two years pensionable service by deleting the option of granting 2 years bonus upon completion of 20 or more years of service. 5. Amend Para-2:1(ix) & Para-12 of EPS'95 (17,626) (19,850) (23,410) To increase the pensionable age from 58 to 60. 6. Amend Para-14 of EPS'95 (4,249) (4,650) (4,931) To discontinue the option of withdrawal benefit for less than ten years of service, except at superannuation. 7. Delete Para-16:5(a) of EPS'95 Negligible Negligible Negligible To disallow nominee pension. (Note -2) (Note -2) (Note -2) 8. Amend para-12(7) (4,916) (6,814) (8,485) To disallow early pension option before 55 years of age. 9. Merge the Employees' Deposit Linked Insurance Scheme, 1976 in to the Employees' Pension Scheme, 1995. The merger will result in the following benefits: Note -3 (i) The employer contribution of 0.5% received under the EDLI Scheme will be credited to EPS'95, thereby raising its level of funding. (ii) The current surplus in the EDLI Fund and the future surplus, if any, will bolster the stability of the Pension Fund. REPORT OF THE EXPERT COMMITTEE ON EPS,1995 71 (iii) The administration charge of 0.01% and inspection charge of 0.005% paid by the employer will be discontinued. 10 Provide a minimum members pension of Rs. 1000 to all. 3,209 3,209 3,209 11 Valuation of different contribution enhancement options as follows: Note-4 Addition to normal contribution 2.00 2.00 2.00 Option 1: 46,079 57,770 66,469 Addition to normal contribution 3.34 3.34 3.34 Option 2: 76,952 96,476 111,003 5.34 5.34 5.34 Option 3: 123,031 154,246 177,471 7.34 7.34 7.34 Option 4: 169,110 212,016 243,940 10.84 10.84 10.84 Option 5: 249,748 313,114 360,260 12 Provide for at least one year contribution instead of one month. In cases where less than one year service is rendered before death of the member, the contribution may be returned with interest (declared under Employees' Provident Fund Scheme for that year). 1.01 1.01 1.01 13 What will be the financial implication of introducing the provision of giving a pension rise of 3% (compounded) per annum to all pensioners 101,896 192,746 246,038 REPORT OF THE EXPERT COMMITTEE ON EPS,1995 72 14 What will be the financial implication of restoring back the Commutation Option as per erstwhile para-12A of EPS'95 Note 5 Note 5 Note 5 15 What will be the financial implication of restoring back the Return of Capital Option as per erstwhile para-13 of EPS'95 65,109 109,121 155,392 16 What will be the financial implication of decreasing the Early Pension Reduction Factor to 3% (presently 4%) under para-12(7) of EPS'95 10,871 14,702 18,400 17 What will be the financial implication of restricting Children Pension to only 1 child at a time and that too upto only 21 years of age? (presently children pension can be given to 2 children at a time and upto 25 years of age) (681) (950) (1,246)             Note :         1) It is assumed that all will contribute on last drawn salary without ceiling and will get benefit on that salary   2) Since the data in respect of the employee who have nominated other then their family as a beneficiary is not available and the number of such cases are assumed to be few the effect is not given.   3) As the EDLI is valued separately the surplus of the EDLI will get transferred to EPS 1995 fund.   4) Effect is the additional contribution being generated and not related to shortfall   5) Since the commutation is the present value of future pension the impact on the liability is nil as the commutation will happen from the present vale only   6) We feel that by freezing the past service there will be loss to some section of employees who are going to receive the benefit for salary less than 6500 pm and it may be administratively hampering to maintain records REPORT OF THE EXPERT COMMITTEE ON EPS,1995 73 APPENDIX –9      Summary of the Comments of the Members of Expert Committee On the  Proposed Conceptual Draft of Provident Fund­cum­Pension Annuity  Scheme       Sh. Nalin Thakor   at   N ure of the Scheme  • The proposal suggests conversion of EPS, a defined benefit final salary type of pension  scheme into a defined contribution type of pension scheme.        • The proposal needs favourable consideration as it will resolve the issue of (future)  actuarial deficit of EPS.  Also, it is in line with changes effected by Central Government  for its ‘new’ employees through New Pension Scheme (NPS).      Contribution rate  • A pension based on employer and Government contributions at 12% or 13.16% of  salary  is  not  likely  to  provide  reasonable  pension  especially  when  consideration  is  given to inflation, increasing medical care costs, increasing life expectancy.      • Employer  contribution  rates  (12%  or  12.50%  +  about  4.50%  as  administrative  charges) are already high and an increase in the rates do not seem appropriate.    • It seems appropriate to transfer employee contribution at 6% of salary to ECA.  It will  increase  contributions  for  annuity  to  18.50%  or  to  19.16%  with  employer  contribution at 0.50% to EDLI account, which may be merged with ECA/AA.    Sh. S.P. Subhedar   at   N ure of the Scheme  • Replace the unsustainable DB Scheme, set up in 1995 in lieu of the DC Scheme, by a DC  scheme providing for annuities.      • In favour of the structure of the proposed scheme.      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 74 Contribution rate  • The  EPS,  95  gets  only  9.49%  contribution,  it  is  better  placed  than  the  DC  schemes  because  pension  is  not  index  linked  and  pension  for  service  prior  to  16.11.95  is  related to pension accrued under Family Pension Scheme, 1971.      • The Government was contributing 1.16% to the Employees’ Family Pension Scheme,  1971, as it was a DB scheme.  The same was continued perhaps because the EPS, 95 is  essentially a DB Scheme.  Would the Government continue that contribution for the  proposed scheme, which would be a DC scheme?    Annuitisation of the Accumulations    The way the proposed scheme is designed, it would appear that the full accumulation will  have to be mandatorily annuitized.  However, if it is not so, and if any option were to be  provided to the retirees, about the quantum of accumulation to be annuitized, it would be  exercised against the annuity provider as retirees in good health (bad risk for annuity  providers) would go in for annuitisation of higher proportion of accumulation and those  in indifferent health (good risks for annuity providers) would chose to annuitize only the  inimum amount as mandatorily required.  m   In case of disablement    he annuity providers must provide appropriate annuity rates as applicable to disabled  T lives.  ur   P chasing of Annuity    •   Buyer will have the choice of annuity provider.  • Would the annuity provider be of retiree’s choice or as decided by the EPFO?  It would  be desirable to leave the choice of annuity provider to the retiree.    Default by the Employer    Currently, EDLI does not provide for making good the default by an employer in paying  PF contributions.  How appropriate it would be to use EDLI funds for making good the  employer defaults in paying PF contributions.  Further, many employers would have been  granted exemption from the EDLI because of their having taken insurance scheme from  life insurers.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 75   Pensioner as on cut off date and after cut off date    Currently, the pensions are paid from EPS, 95 fund, i.e. the demographic and economic  risks are borne by the EPS, 95 fund.  The annuities are not purchased from the approved  annuity  providers  as  is  envisaged  in  the  proposed  scheme.    The  number  of  existing  pensioners is not large and one a closed group, it would dwindle over time, making it  difficult for EPS, 95 fund to bear the demographic risks, it would therefore be desirable  and necessary to purchase from the approved annuity providers appropriate annuities  for the existing pensioners as well.    Transfer of amount in ECA and GCA    When a DB scheme is converted to DC Scheme, the transfer value of the accrued benefits  is  credited  to  individual  accounts  in  DC  scheme.    The  Table  ‘E’  is  used  for  transfer  of  contributions from EPS’95 to exempted or other pension funds or vice‐versa.   Thus it  transfer values and can be used as envisaged here.  essentially gives  On assumptions    The  three  Pension  Fund  Managers  who  are  managing  the  government  employees’  pension money under the NPS have given more that 11% return.  If the proposed scheme  goes through, legislative changes would be needed to amend/replace the EPS, 95 scheme  and it may be possible then to bring about legislative changes needed to entrust the fund  management under the proposed scheme to the Pension fund Managers under NPS.  It is  reported in the newspapers that the SBI Pension Fund was likely to entrust management  of Rs. 2000 cr. to PF Managers under NPS.    Sh. Bhudev Chatterjee    Nat e e ur  of the Sch me  • It  is  Defined  Contribution  Scheme  instead  of  existing  Defined  Benefit  Scheme  for  existing members of EPS, 95.        • The Defined Contribution Scheme favours Employer since it aims to limit the rate of  contribution.        REPORT OF THE EXPERT COMMITTEE ON EPS,1995 76   Con e tribution rat   • The  shifting  of  comparing  from  9  ½%  to  13  1/6%  will  not  result  in  a  substantial  increase in benefit (compare contribution for New Pension Scheme is 20% whereas  27%  of  salary  is  contributed  to  Consolidated  Fund  of  India  for  Government  Employees)      • We have one Provident Fund Scheme which is Defined Contribution Scheme why do  we need another.  We may only increase contribution to the Provident Fund.    Average Salary    Career average salary scheme like Provident Fund is only a part replacement of salary at  retirement,  consequently  is  not  adequate  of  maintenance.  The  Government  of  India  is  aware  of  this.    Thus  all  the  schemes  designed  after  Employees’  Provident  Fund  and  Miscellaneous  Act,  1952  like,  Employees’  Family  Pension  Scheme,  1971,  EDLI,  1976,  ayment of Gratuity Act, 1972, Encashment of Leave are all based on final salary.  P   Disadvantages of Defined Contribution Scheme      •   Fluctuation of yield on investment effects the accumulation of contribution, which is  . converted to annuity   • Changes  in  annuity  rate  affects  amount  of  Pension  to  the  beneficiary.    Members  retiring at different dates with same accumulation will receive different Pension.    • The  administrative  expertise  of  Trustees  plays  an  important  part  on  investment  of  .  fund leading to quantum of pension   •   No minimum pension to members.  •   Death at early age and disablement retirement will have a raw deal.  • Annuity market is not at all developed.  The LIC issues one type of plan, 3% increase in  atronage.  annual annuity which is not very satisfactory.  It has not received much p   •   Accrued benefits can not be altered without consent from the members.  • Defined Pension Scheme be properly funded for existing employees because this is  more beneficial to employees.  If required employees will also contribute to the fund  like the New Pension Scheme of the Government.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 77   Sh. Nirmal  Ghosh    Contribution rate    We could consider for raising contribution from Employer and Employees presently 12%  to 15% and difference of 3%  may form additional corpus of EPF Pension Scheme to pay  more  pension  to  the  pensioners.    This  enhancement  is  subject  to  acceptance  by  the  trustees.    But  equally  I  should  opine  that  the  government  contribution  for  such  social  security scheme (EPS, 95) should be increased to fulfill the socio‐economic commitment  or the old age people.  f   Annuitisation of the Accumulations      The way the proposed scheme is designed, it would appear that the full accumulation will  have to be mandatorily annuitized.  However, if it is not so and if any option were to be  provided to the retirees about the quantum of accumulation to be annuitized, it would be  exercised against the annuity provider as retirees in good health (bad risks for annuity  providers) would go in for annuitisation of higher proportion of accumulation and those  in indifferent health (good risks for annuity providers) would chose to annuitize instead  f minimum amount, it should be appropriate and/or standard amount  o   Comments on sample calculation for various annuity scenarios    My foremost suggestion is to the enhancement of contribution as already been proposed  by which we can have a clear calculation for achieving better benefit for the Pensioners as  well as to reduce persistent deficit also and make comprehensive review to find out a  comparative rate chart of interest from institutions like LIC and other similar institutions  just to select higher interest paying institutions so that pensioners may earn more money  to  overcome  all  crisis  at  their  old  age  entering  into  New  Pension  Scheme.    While  considering the calculations as has been envisaged in the Table ‘E’ like actual benefit from  the value of monthly annuity which should be most progressive.      REPORT OF THE EXPERT COMMITTEE ON EPS,1995 78 APPENDIX – 10        Comparison of The Proposed Scheme With New Pension Scheme, 2009    S.  No.    Title      Provident Fund­cum­ Annuity Scheme    New Pension Scheme,  2009 (voluntary for  other citizens)  (1)  (2)  (3)  (4)    1.  Date  of  applicability  01.04.2011 (proposed)  w.e.f. 01.05 09  .20 2.  Category  of  Scheme  Defined contribution    Voluntary  contribution  (with  minimum  contribution prescribed)  3.  Nature of Scheme  Mandatory  contribution  by  Employer and Employee   Voluntary  contribution  by  subscriber.  4.  Disability  Benefit  In  case  of  disability,  the  member  will  be  entitled  to  get  accumulations  in  Provident  Fund  Contribution  Account  and  purchase  annuity  from  the  accumulations  in  Annuity  Contribution Account.     In addition, the member will  be  entitled  to  a  lump­sum  from  EDLI  and  add  it  to  the  amounts  outstanding  in  Annuity  Contribution  ccount  for  purchasing  the  nnuity.   A a   Not available.         5.  Benefit  to  the  family  in  case  of  death in service  In  case of death, the  spouse  of  the  member  will  be  entitled  to  get  accumulations  in  Provident  Fund  Contribution  Account  and  purchase  annuity  from  the  accumulations  in  Annuity  Contribution  Account.     In addition, the member will  be  entitled  to  a  lump­sum  from  EDLI  and  add  it  to  the  amounts  outstanding  in  Annuity  Contribution  Not available.         REPORT OF THE EXPERT COMMITTEE ON EPS,1995 79 S.  No.    Title      Provident Fund­cum­ Annuity Scheme    New Pension Scheme,  2009 (voluntary for  other citizens)  Account  for  purchasing  the  annuity.     6.  Recurring  Benefit  to   the employee/  member  on  superannuation/  retirement.  Subscriber  to  purchase  annuity  on  completion  of  the  age of 60 years by utilizing the  full  accumulations  i.e.  ontribution given above with  nterest earned thereon.  c i     Subscriber  to  purchase  annuity  on  completion  of  the  age  of  60  years  by  utilizing  at  least  40%  of  ccumulations  in  the  a account.    Subscriber  may  purchase  annuity  at  any  age,  at  his  option  before  completion  of  the  age  of  60  years  by  utilizing  at  least  80%  of  the  accumulations  in  the  account.    7.  Quantum  of  benefit to member  Annuity  value  shall  be  based  upon the final accumulation in  Annuity  Contribution  Account.  Annuity  value  shall  base  on  the  percentage  of  accumulation  in  the  account  utilized  for  purchase  of  annuity  and  the  type  of  annuity  opted  for.  8.  Benefit  in  case  of  default  by  the  employer  Member/family  to  get  the  same  accumulations  in  Annuity  Contribution  Account  as  if  the  default  by  the  employer  would  not  have  occurred.  However,  the  employer shall not be absolved  from  his  liability  and  the  amount due from him shall be  recovered  and  deposited  to  EDLI as soon as possible.  Annuity  purchased  by  the  subscriber  is  linked  with  accumulated  savings,  since  voluntarily  subscribed.  9.  Withdrawal  benefit  No  withdrawal  permitted  except on exit from Scheme.  No  withdrawal  permitted  e except  on  xit  from  Scheme.  10.  Annual Increase in  the benefit  Annuity  value  purchased  may  be  Fixed  or  incremental,  as   subscriber.  opted for, by the Annuity  value  purchased  may  be  Fixed  or  opted  for,  r.  incremental,  as  by the subscribe 11.  C p   ommutation  of  ension.  Does not apply.  Does not apply.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 80 S.  No.  Title    Provident Fund­cum­ Annuity Scheme  New Pension Scheme,  2009 (voluntary for  o iz s)        ther cit en 12.  Eligibility  Registration/  Membership/  enrolment.   for  Non‐Government  Employees  working  in  establishments  covered  under  EPF  &  MP  Act,  1952  (without  any  wage  ceiling).  Any  citizen  of  India  whether  employed/self‐ mployed/unemployed  ncluding NRI  e i   1   3.  Age  criteria  for  Registration/Me mbership/  Enrolment  Any  time  on  joining  EPF  Scheme  1952/Exempted  PF  but  below  60  years  Scheme  of age.  Age  at  entry  is  not  less  than  18  years  and  not  n 55 years  more tha 14.  Age  of  Exit  (for  eligibility  for  benefit  in  normal  course)  60 years  60 years   15.  Registration  /Membership/  Enrolment  formalities  Through employer, from the  date  of  joining  the  establishment.       No registration fee.  Through  Point  of  Presence  –Service  Provider.  Subscriber  to  obtain  Permanent  Retirement  Account  Number  (PRAN)  and  complete  other  registration  formalities.  Charges  payable   Rs.100/­.  16.  Contribution  Total  rate  of  contribution  in  Annuity  Contribution  Account  would  be  13.5%.    Out  of  13.5%,  the  11.5%  shall  be  diverted  from  the  employer’s  share  of  contribution  and  2%  shall  be  contributed  by  the  Central  Government.   However,  in  cases  where  the  rate  of  contribution  is  10%  each  from  employer  and  employee,  the  diversion  from  employer’s  share  would  be  9.5%,  and  employee’s  share  would be 2%, making a total of  11.5%.  The remaining 0.5% of  the  employer  share  shall  be  diverted  to  EDLI  from  where  the accumulation for providing  insurance in case of death and  disablement  are  to  be  provided.  Mandatory  subscription  s.500/‐  per  transaction  R or Rs.6000/‐ p.a.    inimum  4  transactions  n a year.    M i     Failing  which  Rs.100/‐  ill  be  charged  (as  w penalty).    Government  contribution   @Rs.1000  p.a.  to  be  credited  in  each  account  as  announced  in  Budgetary  speech  for  three years.  REPORT OF THE EXPERT COMMITTEE ON EPS,1995 81 S.  No.  Title    Provident Fund­cum­ Annuity Scheme  New Pension Scheme,  2009 (voluntary for   citizen       other s)  17.  Maintenance  of  accounts  The two accounts in respect of  each  member  shall  be  maintained separately and the  interest  on  the  outstanding  accumulations  in  these  accounts shall be added every  year.  Individual  account  maintained with additions  of interest every year.  18.  Cost  of  administration  Borne  by  employer  during  contribution period.    Borne  by  the  subscriber  while  receiving  the  annuity  (built in).  Borne  by  the  individual  while subscribing & also  while  receiving  the  annuity (built in).   19.  Adm.  Charges/  fees by CRA/ PoP  No  charges  payable  by  member.   Administration  charges  are  paid  by employer on month  to  month  basis,  linked  to  wages  earned  by  employee,  while employed.  payable by individual @  Rs.  30/­  per  transaction  and annual maintenance  charges of Rs.350/­ p.a.   20.  Fund  management  charges   No  charges  payable  by  member.   Charges  paid  from  central  administration account.  Payable by subscriber @  0.0009%  per  annum  of  amount  invested,  through NAV deduction.  21.  Tax exemption for  contribution  by  employee/employ er/subscriber   EEE shall apply to the amounts  in  Provident  Fund  ontribution  Account  and  nnuity Contribution Account.  C A     Subscriber  contribution  is  covered  in  prescribed  nvestments  u/s  80  C  of  i Income Tax Act.     Not  applicable  in  case  of  Go Central  vernment  contribution/subsidy.  However,  lump‐sum  withdrawal  from  account  taxable  and  annuity  is  income.  22.  Annuity providers  To be designated by EPFO.  Yet to be decided.  23.  Nature  of  saving  plan  Social  Security  plan  having  insurance  benefit  in  ontingencies  of  death  and  c disability.     On other counts, it is a defined  contribution pension scheme.  Financial plan linked with  returns  on  investments  and  future  economic  conditions.