An expert group has called for carving out two separate accounts -- PF and annuity -- in the employee provident fund scheme to meet the challenge of fund depletion in the pension scheme and introducing greater transparency for subscribers.
Under the existing scheme, the pension is paid out of the pension fund, which is managed by Employees' Provident Fund Organisation (EPFO).
The Employee Pension Scheme (EPS) 1995, covering 4.45 crore (44.5 million) formal sector workers, has become the government's area of concern due to surging deficit that had reached Rs 22,000 crore (Rs 220 million) by March 31, 2006 as per the latest data available.
The committee, headed by former additional Labour Secretary S K Srivastava, has proposed a provident fund-cum-annuity scheme in which two accounts would be maintained for each member a PF account (PFA) and an Annuity Contribution (or pension) Account (ACA).
Among other things, the committee feels that the move will help reduce mounting deficits in the EPS as EPFO will pay off the annuity amount by purchasing a scheme for the subscriber and save various costs in the process. Annuity refers to a scheme sold by insurers designed to provide payments to the holder at specified intervals, usually after retirement.
The old age regular benefit to the members, under the new arrangement, would be provided in the form of annuity purchased through the accumulation in ACA.
The expert group report is likely to be discussed on September 15 at the meeting of Central Board of Trustees (CBT), the apex decision making body of EPFO.
Currently, a subscriber of Employees' Provident Fund (EPF) gets only one account, but he is eligible for both provident fund and pension.
However, the report says that although subscribers get defined sum in pension through a fixed formula, the scheme is managed in a non-transparent manner. The new arrangement, the group said, "would ensure that individual accounting of the members, addressing their long-standing demand of transparency in pension fund accounts and commensurate benefits."
At present, 8.33 per cent of workers' salary is contributed towards EPS to which government contributes 1.16 per cent of an employees' pay, which adds up to 9.49 per cent of the salary.
In the proposed scheme, a higher percentage of 13.5 of employee's salary would go to pension account, which would include a government subsidy of 2 per cent. Besides, employee will have an option to increase his contribution in ACA.
The committee says that two separate accounts for provident fund and annuity (pension) will motivate individual members to retain funds in the scheme till superannuation as the scheme would no longer be pooled.
The government constituted a committee in March 2008 for comprehensive review of the scheme. When the EPFO started operations in 1952, there was no family pension benefit for subscribers.
In 1971, family pension was introduced wherein the spouse and other family members receive money in case of the subscriber's demise while in service. Later, under the improved scheme unveiled in 1995 the benefit was extended to subscribers also after retirement and in case of disability during service.