Saturday, May 11, 2013

[aaykarbhavan] Business standard news updates 12-5-2013



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EPFO doesn't have birth record of 95% members


PF PENSION SCHEME'S HUGE DARK HOLE

SREELATHA MENON

New Delhi, 11 May

The pension scheme run by the Employees Provident Fund Organisation ( EPFO), a decades- old statutory body with 80 million members, doesn't have the date of birth of almost 95 per cent of them.

This means, it has little idea of the money it needs to pay each month for its members' pension, the date when members would be eligible to get a pension and, of course, the number of pension eligibilities each year — despite an annual valuation of its accounts. The Employees Pension Scheme, in its present form, was begun in 1995. As is known, 12 per cent of one's basic pay is deducted as provident fund ( PF); there is a matching contribution from the employer. Of the latter, an amount equal to 8.33 per cent of the basic pay ( subject to a cap of 6,500 a month) goes to the pension scheme; the rest goes to the PF account. The government adds another 1.16 per cent of the salary, again subject to a cap.

The realisation of the flaw in the pension fund dawned after a team from EPFO consulted the World Bank. The annual valuation done by an actuary ( the latest report was released last year, for 200809) had found the fund short of 53,000 crore but, with the birth data of just five per cent of members, the actuaries had been shooting in the dark, EPFO sources said.

"It is true we have the birth date of only five per cent members," admitted Anil Swarup, the central PF commissioner.

"But we're now going to rectify this." His office has now issued acircular to the regional offices, to compile and send the complete data of members.

M/ s AK Pandit had been appointed as actuary for a fresh valuation of the pension scheme. The report was to be based on the full data of 30 million active members, to be then extrapolated to 50 million inactive members, sources said. The report is expected in July.

The huge number of "inactive" members is attributed to the cumbersome process of getting changes done in one's PF account — it is common, it appears, for people to just open a new account when they change a job, instead of linking an old account with a new one; with small amounts, many are just left idle.

The conclusions drawn by actuaries appointed in the past are suspect — not only because of insufficient data on the members. The fund available has so far been calculated on the basis of an average return of eight per cent a year; the returns have actually always been higher than this, even nine per cent, EPFO sources say. The fresh actuarial review would do a sensitivity analysis of the fund, based on returns ranging from eight to nine per cent. There is also a problem with the calculation of pension, based on salary drawn in the final year of service; it appears these do not, in many cases, match contributions to the fund made by a member. The review would take another look at this, sources said, going into the final three years of pay drawn.

The pensionable period is another issue the actuary is to examine. Currently, a member getting a pension for 25 years of service is given a bonus of two years; that is, his or her pensionable period is calculated as 27 years. This, again, burdens the retirement fund. The actuary was to go into both these anomalies, sources said. The correct estimation of salary is estimated to save the fund close to 5,200 crore. Doing away with the bonus would lead to an addition of close to 14,900 crore.

And, if the rate of accrual changes from eight to nine per cent, there will be an additional inflow of 18,000 crore. The three, in sum, should yield an additional 38,000 crore. Whether the government then wants to implement the corrections to streamline the scheme would be left to it, sources said.

Has initiated efforts to get full details only now

|Two- year bonus on pensionable period:

5,186 CRORE

|Calculation of pension on the basis of last year of service ( and not last three years):

14,926 CRORE

|Analysis based on rate of accrual of 8% (and not 9%):

18,000 CRORE

|Total funds lost:

38,000 CRORE

HOW PENSION FUND LOSES MONEY

 



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