Pro-rata scheme for employees, who opted for higher pension plan, sparks concerns

Kozhikode: Concerns have been raised over the Employees' Provident Fund Organisation (EPFO)'s decision to implement a pro-rata (in proportion) system for higher pensions. In a recent e-mail to zonal offices, the EPFO explained, citing examples, to calculate pension on a pro-rata basis. The e-mail was sent after zonal offices raised doubts about the new system.

The EPFO, however, did not issue a circular, detailing the pension calculation under the pro-rata system. The office in Delhi did not respond to questions about the e-mail as well. The pro-rata system would apply to those who had retired from service after September 1, 2014. Their pension would be calculated separately — before and after September 1 — in proportion with the salaries drawn during the two periods. It would lead to a significant cut in the pensions of a majority of retirees.

Malayala Manorama in November last had reported the move to implement the pro-rata system for higher pensions. According to the new system, the average salary drawn before September 2014 would not be considered, but three other aspects would be taken into account: The average salary drawn during the 60 months preceding retirement, the highest monthly salary drawn till August 31, 2014, and the highest salary received after September 2014.

The monthly pension would be calculated based on the average salary or the highest monthly salary, whichever is lower. The highest salary before September 2014 would be much less in case of those retiring after several years. It would lead to the pensioners losing money. However, those with a lesser service period before or after 2014, would not incur much loss like others with a longer service period.

The existing pro-rata system was implemented on September 1, 2014. It is meant to calculate the pension of those employees contributing to the pension fund only up to the wage ceiling fixed by EPFO. 

So the scheme mandated to calculate the pension by putting a wage ceiling of Rs 6,500 for the service rendered till August 31, 2014, and with a cap of Rs 15,000 for the service from September 1, 2014, even if the actual pay was higher. The EPFO justified the move saying it had accepted the contribution to the pension fund based only on the wage ceiling. However, those who had opted for the higher pension should contribute a sum proportionate to their actual monthly salary during their entire service period. 

While their contribution to the pension fund has not been classified as pre- or post-September 2014, calculating their pensions using the old pro-rata yardstick would be tantamount to a denial of justice. 

Meanwhile, it has been pointed out that the pro-rata system in the higher pension scheme is unjustifiable and a violation of the Supreme Court verdict in the higher pension case.

Calculating pro-rata pension (as cited by EPFO)

An individual who joined the service on September 1, 1996, retires on August 31, 2023. Suppose, his average salary during the last 60 months in service was Rs 18,000, and the highest salary drawn after September 1, 2014, was Rs 11,000. Later, his highest salary increased to Rs 19,000.

The highest pension should be calculated as below:
The exact service period should be calculated by dividing the total service days by 365.

Loss due to pro rata
The example the EPFO cited above is discarded, the pension (outside the pro-rata scheme) would be as follows:

Total service will be 29 years, including two years' weightage. The average salary will be Rs 18,000.
Pension: 18,000 x 29/70 = Rs 7,457.
Loss under the pro-rata scheme: Rs 2,000 (7,457 - 5,457).

Those who contribute to the pension fund from within their salary limit, too, would incur a loss.
Actual pension: 15,000 x 29/70 = Rs 6,214
Loss: Rs 2,428 (6,214 – 3,786)