EPFO is considering Change in Pension Plan Formula

The Employees’ Provident Fund Organization (EPFO) is currently exploring the possibility of revising the existing formula used to determine monthly pensions.

A proposal suggests determining the monthly pension based on the average salary received throughout the entire pensionable service.

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However, a final decision will be made after the ‘Actuary’ assesses the pension, its payment, and associated risks.

A reliable source with knowledge of the matter provided this information.

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Current Pension Scheme: EPS-95

Under the current system, EPFO calculates the monthly pension by multiplying the pensionable salary (average salary of the last 60 months).

by the pensionable service and then dividing it by 70. The source reveals,

“There is a proposal to alter the formula for the monthly pension under EPS (95). It aims to include the average pensionable salary received throughout the pensionable service instead of relying solely on the average salary of the last 60 months.”

However, the source clarified that the proposal is still at an early stage, and no final decision has been made yet.

The ultimate verdict will be based on the report provided by the ‘Actuary.’

It is worth noting that if EPFO does modify the pension formula, it will impact the monthly pension for all.

including those who opt for higher pension amounts according to the current formula. This change would result in less competition.

To better understand the implications, let’s consider an example.

An Illustrative Example

Suppose an individual who chooses a higher pension has an average salary of Rs 80,000 for the last 60 months and a pensionable service of 32 years.

Under the existing formula (80,000 times 32/70), their pension would amount to Rs 36,571. However. when considering the average salary throughout the entire pensionable service, the determination.

of the monthly pension would be lower due to the initial days of the job having lower salaries (basic salary and dearness allowance).

Option for Opting Higher Pension

Last November, the Supreme Court directed the government to provide subscribers with a four-month window to opt for a higher pension.

EPFO has since introduced an online facility allowing subscribers to fill out a joint option form with their employers to select a higher pension.

The initial deadline for this process was May 3, 2023, but it has been extended to June 26, 2023.

Contribution and Subsidy

Currently, EPFO subscribers contribute to the pension based on a fixed limit of Rs 15,000 per month, even if their actual salary exceeds this threshold.

Opting for a higher pension will enable them to receive a greater monthly amount.

Employees contribute 12 percent to EPFO’s social security scheme while out of the employer’s 12 percent contribution, 8.33 percent is allocated to EPS, with the remaining 3.67 percent going to the Employees’ Provident Fund.

Addressing the Need for Change

When questioned about the necessity for changing the formula, the source explained,

“The belief is that providing higher pensions over an extended period may lead to financial burdens. Therefore, a new formula is being considered.” Regarding the Rs 6.89 lakh crore fund held in the Pension Fund.

the source emphasized that this money is not exclusively for pensioners but also belongs to all shareholders associated with EPFO and its employees.

The Employee Provident Fund Organization must ensure the well-being of all parties involved.

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