An employee insurance fund organization has proposed limiting the early withdrawal of pension contributions by workers from the formal sector as part of a new scheme that will be reported under labor laws. The scheme, aimed at a higher level of monthly pension after retirement for workers, will also lead to the creation of individual pension accounts for new employees.
“It is proposed that the new pension plans, which will be formulated under the Social Security Act, may allow members to withdraw benefits from pension schemes only after two years of continuous retirement,” according to documents reviewed by BloombergQuint.
Currently, the withdrawal of contributions from the employee pension system, managed by EPFO, can take place two months after leaving the job.
The EPFO Central Committee of Commissioners, led by Labor and Employment Minister Santos Kumar Gangwar, will meet on Thursday to take over the proposed pension plan.
“Due to frequent withdrawals, a member retires with a shorter retirement age and receives a lower pension accordingly. “Without such a withdrawal, the members would receive a much higher pension,” the agenda of the meeting reads.
The average age of pension system members is 38, EPFO said, indicating that “most members who join at an early age withdraw from the program when they change jobs.”
Switching to suppressing the withdrawal of the pension amount could also lead to the creation of a larger corps in the pension fund, which is facing losses. EPFO’s pension account had a net actuarial deficit of 37,327 kroner as of March 31, 2019, according to the above documents.
In addition, those who become members of the EPFO program will receive an individual pension account to which they will also be able to make voluntary contributions. Workers in the formal sector will earn interest on their pension amounts, just as they earn on the savings of an insured fund under EPFO.
Formal sector workers contribute 12% of their salary (basic salary and YES) to the EPFO scheme with an appropriate employer contribution. Of that, 8.33% of the share of employers goes to the pension system.
However, subscribers receive a fixed pension based on the formula, regardless of the contribution from salaries during employment. The average pension that an individual received was only Rs 1,438 per month during 2019-20 due to the existing framework.
This is because the EPS fund is a joint account on which the monthly contributions of all members are combined into a single account. All those who have completed at least 10 years of service receive a monthly pension after reaching the age of 58.
This system of pooling pension contributions and enabling early retirement has made EPFO’s pension fund extremely unsustainable.
The pension system will be grouped into three categories:
New members, with a monthly income of up to Rs 15,000, join after the Social Security Code enters into force.
Members, under the new labor laws, with a monthly income of more than Rs 15,000.
For existing members of the pension system, the only change would be to limit pension withdrawals. For new members, pensions will be accumulated annually based on the new formula. Members will be able to adjust their contribution to the pension system.
Members of the pension system can review their contribution every three years.
Members will also be able to contribute to the pension system even when they are not employed. The new provisions will encourage members to save more on their individual pension accounts by making contributions at higher rates.
Those earning less than Rs 15,000 will be compulsorily covered by the pension system and will receive a minimum monthly pension as notified by the central government. The pension system will be voluntary for those earning above this income threshold; however, such members will not be entitled to a minimum monthly pension.