Question

In a comprehensive fashion, present the various components of the private sector's Retirement or Pension Program. Explain the extent of its coverage and its membership. Explain how it is financed, how it pays benefits to its members. Dscuss its solvency. Provide your recommendations for long-term sustainability.

Answer 1

In private organisations people working making PF (pension fund) contributions are eligible for pension program under the Employees’ Pension Scheme (EPS) on fulfilment of some condition and terms

The EPS (Employees pension Scheme) is part of the provident fund (PF) scheme of private sector organisations having more than 20 employees. The scheme is optional for organisations with less than 20 employees, for semi-government organisations

Coverage: The (EPS) scheme is compulsory for private sector employees having a basic salary of Rs 15,000 (which is revised periodically)and It is optional for employees having a basic salary of over Rs 15,000 per month.

basic salary = basic wages, retaining allowance and dearness allowance (DA), including the cash value of any food concession.

How to apply: The Account(EPF) is opened for the employees who join an organisation and registered under the EPFO.

Contribution: 12 per cent employee contribution + 12 per cent employer contribution =total 24 %contributions out of this 15.67 per cent goes to EPF. Out of 12 per cent contribution by employers, 8.33 per cent goes to EPS. The Central government also contributes 1.16 per cent of the eligible basic salary.

Financed: pension amount is financed by the following formula: X=A*B/70

(Where, X=monthly pension, A=pensionable salary, B= pensionable service).

Pensionable salary is monthly average pay drawn during the contributory service period in a span of 12 months preceding the date of exit from the membership of the PF. The maximum pensionable salary is Rs 15,000 per month limited, unless if at the option of the employer and employee, contribution is paid on salary exceeding Rs 15,000 per month from the date of commencement of this scheme or from the date salary exceeds Rs 15,000, whichever is earlier, and 8.33 per cent share of the employer thereof is remitted into the pension fund.

Benefits: apension is eligible of an employee if he/she has rendered eligible service of 10 years or more and retires at the age of 60.One may also option for early pension if he/she retires at an age of 50 after rendering eligible service of 10 years or more.

the amount of pension is reduced by 4 per cent for each year if taken in advance before 60 years of age.

If an employee retires at the age of 60 after rendering 20 or more years of eligible service, 2 years will be added to the pensionable service, which is determined by the contribution received or receivable in the EPF (employees’ pension fund.)

On the death of the member, the family (spouse and two Children below25) is entitled to receive monthly family pension.

Recommendations for long term sustainability :Employee pension scheme is benefited, employee after retirement or at age 60 and also provide tax benefited for the such as Employee’s entire contribution and contribution of the employer in EPF OR upto 15000 per month are tax exempt under section 80C of the Income Tax Act.