EPFO pro-rata scheme for those in higher pension plan, sparks concerns

Concerns have been raised over the Employees' Provident Fund Organisation (EPFO) 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, how to calculate pensions 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 email 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 to the salaries drawn during the two periods. It would lead to a significant cut in the pensions of a majority of retirees.

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 pensioners losing money. However, those with a shorter service period before or after 2014 would not incur much loss like others with a longer service period.

The new scheme mandated zonal offices to calculate the pension by putting a ceiling of Rs 6,500 for the service rendered until August 31, 2014, even if the salary was higher. The service pension post-September 1, 2014, should be calculated with a cap of Rs 15,000 on monthly salary (even if the actual pay exceeded the set limit) during the service period.

The EPFO justified the move, saying it had accepted the share of the pension fund only based on the ceilings. However, those who have opted for the higher pension plan should contribute a sum proportionate to their total monthly salary during their entire service period.

While their contribution has not been classified as pre- or post-September 2014, calculating their pensions using the new yardstick would be tantamount to a denial of justice. Meanwhile, it has been pointed out that the pro-rata system in the pension scheme was unjustifiable and in violation of a Supreme Court order.

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 number of service days by 365.

Loss due to pro rata
The example of 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)