UPS is fine, what about EPS?

EPS95 scheme as it exists is a cruel joke on the pensioners and much more in need of reforms

Alok Tiwari

The effects of coalition politics on Prime Minister’s Narendra Modi’s third term are becoming clearer by the day. There is none of the brash confidence seen in his first two. After initially appearing to have its way with the NDA partners, the party is in one-foot-forward-two-feet-back mode. Not only has it quietly withdrawn the Broadcast Bill that would have given it powers to control independent online journalists but has also beat a hasty retreat on Waqf Board reforms and lateral entry into civil service. Now it has succumbed to the pressure of opposition and revised the pension scheme for government employees.

The revision was quickly adopted by Maharashtra government too which faces an uncomfortable election situation and is throwing freebies at every segment imaginable. More state governments are expected to follow suit. The new Unified Pension Scheme does not quite bring back the old pension scheme but has restored substantial benefits that were available under it. For one, the UPS guarantees pension equal to 50% of the average pay drawn in last year of service for all employees who complete 25 years of service. It also enhances the minimum pension of Rs 10,000 per month for even employees who put in 10 years of service. The pension has been made indexable which means it will have a component that will rise with inflation.

This is a substantial change. To pay for all this, the government is increasing its contribution towards pension fund from 14% of the pay to 18.5%. Thus, the new scheme restores some of the defined benefits of the old scheme. Only element it retains from the new scheme is that employees will continue to contribute a minimum of 10% of their pay to the fund as before.

Modi government had stoutly resisted bringing back any defined benefit pension on the grounds of fiscal prudence even as opposition clamoured for it. Some opposition-run state governments even announced it for their employees. After a setback in the general election and facing another uphill battle in four states later this year, now the government is thinking differently. The move is welcome to the extent it enhances the welfare of government employees. People may have different opinion about the importance of contribution they make to the society compared to what they cost the exchequer, but government is seen as a model employer and thus must look after its people well.

However, it should not stop at just looking after its own people. There is another, much larger set of employees who inevitably fall on bad days once their working years are over. These are employees of private sector and they are covered under Employee Pension Scheme 1995 or EPS95 for short. Unlike the scheme for government employees, EPS95 receives no government contribution at any stage. The employees are guaranteed 50% of their pay as pension so it sounds good. However, the catch is that this pay limit is capped. The ceiling used to be Rs6500 per month earlier which was enhanced to Rs15,000 in 2014. There is some talk of government increasing it to Rs 21,000 now so that minimum pension under it also rises to Rs10,000.

The pension fund is made up of a tiny portion of employer’s contribution made towards provident fund of the employee. This and the fact that the contributions are made on a capped figure regardless of actual salary of the employee ensures that the pension fund remain small. It also results in ridiculous outcomes. Many employees receive pensions that amount to a few hundred rupees even if their last pay drawn was quite substantial. As an insult to the injury, the pension is not even indexed that means it remains same throughout the life of pensioner. There are already people receiving pension amounts that will not pay for a couple of coffees in a decent restaurant, much less cover month’s expenses of at least one elderly couple. This is because the pension calculated is only on the capped amount and is also related to period an employee has spent as member of EPS. Since private employees frequently change jobs and often end up withdrawing their provident fund, their pension fund too never amounts to anything.

Even though there have been court judgments calling enhanced contribution and higher pensions, both the EPFO that administers the scheme and employers are dragging their feet and are coming up with novel ways to deny the benefit to pensioners. This plus the fact that an overwhelming majority of beneficiaries are poor, not much aware of the rules, and not organized means they remain much worse off. The number of private sector employees is of course many times that of government staff. Their fault is that they are scattered and do not have a political voice. Hence, it has been easy for all governments to ignore their needs.

This needs to change. The contribution of private sector employees to society is as much if not more than government employees. They also have a lot less protection in their jobs and face much more accountability and hence end up working much harder. It is time political parties started looking into their welfare. EPS95 needs to be revised so that pension levels are sufficient to protect the lifestyle of retiring employee. Pension also needs to be indexed to protect against inflation. This would mean revising the nature of scheme so that contributions are on actual pay and not some arbitrarily capped figure. The government will also need to make up the shortfall in the fund. The state cannot discriminate between government and private employees as everyone is a citizen and all pay equal taxes. 

This column appeared in Lokmat Times on Aug 28, 2024