Pension, what pension?

Successive governments have refused to bring down interest rates on the Employees Provident Fund (EPF) and the Employees Pension Scheme (EPS) in line with market realities; indeed, while market-determined interest rates have fallen, governments have hiked them on the grounds that the welfare of 40 million families is involved.

This has now been shown to be baloney. As a recent all-India survey done for the finance ministry by AC Nielsen ORG MARG shows, EPF’s coverage is not 40 million but 13 to 15 million.

In other words, the attention of successive governments (the NDA even raised rates through the declaration of a special dividend) has focused on providing additional benefits to less than 5 per cent of India’s working population.

This ties in with the finding that 17 million of the 40 million figure consist of inactive accounts—which their owners have probably lost track of.

This in turn is almost certainly a result of the poor servicing standards that account holders have come to expect, even accept.

What exposes the crocodile tears shed for the working class is the fact that just 7 per cent of EPF accounts have a balance of over Rs 50,000.

In other words, the substantial benefit of paying above-market interest rates on EPF balances is not to the “aam aadmi” but to the creamy layer of workers.

As for the argument that the EPF and EPS are the only security for the working classes, in 2002-03 the average pay-out was just Rs 36,000, which yielded a monthly pension of a princely Rs 270! Besides, as a report in this newspaper pointed out yesterday, more than 95 per cent of final provident fund settlements made each year are on account of resignations (that is, people withdrawing funds due to leaving their jobs) rather than on account of superannuation.

In short, the two schemes are hardly the retirement/social security solutions they are made out to be.

Nor, by the way, is the government contribution to keeping EPF interest rates above market rates restricted to just hiking interest rates by one or two percentage points above what the EPF Organisation earns on its investments, as is popularly believed.

The reason why the EPFO earns such a high return on its investments, even though gilt yields are around 7 per cent, is that the government pays a higher interest rate on the Rs 50,000 crore deposited with it by the EPFO under the Special Deposit Scheme.

Going still further, each year the government pays another 1.16 per cent of wages on behalf of employees who are covered under the pension scheme, and also foregoes tax payments on EPFO contributions and incomes.

The biggest cost, of course, is the contingent liability the government has taken upon itself. As has been reported for many months now, the EPS has an unfunded gap of around Rs 19,000 crore already (Rs 2,500-3,000 crore when discounted to current prices), and this is increasing with each passing year.

Such a large cost for just 13 million members seems exorbitant, and even more so when the real benefits accrue to the relatively well-off.