EPS tweak should be employee-friendly
THE Employees’ Pension Scheme (EPS), the contributory pension system intended for the well-being of the Employees’ Provident Fund (EPF) members when they retire from service, has become very chaotic. Frequent amendments and unilateral interpretations by the fund authorities and the litigation that followed have resulted in the present impasse wherein hundreds of thousands of employees and retirees across the country find their eligible benefits denied by the Employees’ Provident Fund Organisation (EPFO).
In its verdict on the EPS amendment of 2014, the Supreme Court on November 4, 2022, upheld the methodology amended with retrospective effect for calculating the employees’ pensionable salary.
Under the EPF framework, the employee and the employer contribute monthly to an employee’s EPF account. The EPS was implemented in 1995 to guarantee pension to EPF members upon retirement. A portion of the employer’s EPF share is transferred to the pension fund, using which the member is given a monthly pension after retirement. If the employer contributes a share equal to 12 per cent of the total salary to an employee’s EPF account, the employee becomes eligible to receive a higher pension proportionate to his full salary, provided an option is exercised for the same with permission to transfer a higher amount from the employer’s EPF share to the pension fund.
The amount of monthly pension is calculated as the pensionable salary multiplied by pensionable service and divided by 70.
The pensionable salary before the 2014 amendment was the average monthly salary over the last 12 months in service. The 2014 amendment to the EPS altered with retrospective effect the pensionable salary as the average monthly salary over the last 60 months, which was upheld by a three-judge Bench of the Supreme Court in November 2022.
The apex court has held that “we do not find any illegality or unconstitutionality” in effecting the 2014 amendment for computing, with retrospective effect, the pensionable salary as the average salary of the last 60 months against the average salary of the previous 12 months. In doing so, the Supreme Court noted that the legislative authorisation does exist to modify the scheme prospectively or retrospectively.
The stipulation in paragraph 32 of the pension scheme, which says “At any time, when the Employees’ Pension Fund so permits, the Central Government may alter the rate of contributions payable under this scheme or the scale of any benefit admissible under this scheme or the period for which such benefit may be given”, also received the consideration of the Supreme Court. The SC further considered the illustrations presented by the EPFO showing that the manual labourers and women drawing low wages would get reduced pension when pensionable salary is computed on a 12-month average basis instead of a 60-month average basis. Resultantly, the amended method of calculating the pensionable salary got validation with the observation that there is a reasonable basis for effecting change in the computation methodology for determining pensionable salary.
The salary in regular employment increases gradually over time. Hence, the pensionable salary computed as the average salary of the last 60 months will be considerably lower than that calculated as the average salary of the last 12 months, reducing the pension amount substantially. On an average, a retiree with 30 years of regular service and a last-drawn monthly salary of Rs 1 lakh will lose around Rs 5,000 in his monthly pension owing to this modification. Members who joined the pension scheme knowing and believing the pensionable salary as the amount averaged over the last 12 months suffer because of this rule change midway through service. Backtracking from the pre-agreed terms by the EPFO, causing financial loss to the employees throughout their retirement, is nothing but a breach of trust, unexpected from a statutory body.
Furthermore, if two employees joined the EPS on the same date before the 2014 amendment and continued in service on matching salaries, and if one of them retired a few months before and the other one retired a few days after the 2014 amendment, the employee who retired later will receive a lower pension than the other who retired earlier despite contributing more to the pension fund than the employee who retired first.
If, on the other hand, the EPFO, citing the validity of this amendment, resorts to recouping the pension disbursed over the past years to the already retired employees, it will again fail to be just and fair, apart from causing untold misery to those retirees. A more significant repercussion is that the EPFO, blessed with this authorisation received, is now free to alter the pension calculation retrospectively whenever it so desires in the future, forcing pensioners to pay back the money received.
The 2014 amendment of retrospectively modifying the methodology for calculating the pensionable salary is highly one-sided, unjust and detrimental to the employees concerned. The liberty to amend retrospectively cannot be the liberty to do so in a harmful way. If the intention behind the change of methodology for the calculation of pensionable salary is to ensure a higher pension, as projected by the EPFO before the Supreme Court using certain case studies, it would have been fairer to consider both the computation methods and allow whichever is better.
Even though Section 7 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, permits a rule change with retrospective effect, the change should have only been applied, if necessary, to those joining the EPS after the date of effect of the 2014 amendment. The EPFO needs to take a proactive approach and move quickly for this rectification. The Central Government’s intervention is also essential to resolve this issue in a just and practical manner.
