The pension scheme run by the Employees Provident Fund Organisation (EPFO), a decades-old statutory body with 80 million members (on paper), doesn't have the date of birth of almost any of them. It has, it turns out, the birth date of just 5% of members.
What this means is that it has no idea of the money it needs each month to pay the pension for its members, the date when most of its members would be eligible to get a pension and, of course, the number of pension eligibilities each year - despite an annual valuation of its accounts.
The Employees Pension Scheme, in its present form, was begun in 1995. As is known, 12% of one's basic pay is deducted as PF; there is a matching contribution from the employer. Of the latter, an amount equal to 8.33% of the basic pay (subject to a cap of Rs 6,500 a month) goes to the pension scheme; the rest goes to the PF account. The government adds another 1.16% of the salary, again subject to a cap.
The realisation of the lethal flaw in the pension fund dawned after a team from EPFO consulted the World Bank. The annual valuation done by an actuary (the latest report was released last year, for 2008-09) had found the fund short of Rs 53,000 crore but with the birth data of just 5% of members, the actuaries have been shooting in the dark, EPFO sources said.
"It is true that we have the birth date of only 5% of the members," admitted Anil Swarup, the central PF commissioner. "But we're now going to rectify this."
His office has now issued a circular to the regional offices, to compile and send the complete data of members. M/s AK Pandit have been appointed as actuary for a fresh valuation of the pension scheme. The report is to be based on the full data of 30 million active members, to be then extrapolated to 50 million inactive members, sources said. The report is expected in July.
The huge number of "inactive" members is attributed to the cumbersome process of getting any changes done in one's PF account -- it is common, it appears, for people to just open a new account when they change a job, instead of linking an old account with a new one; with small amounts, many are just left idle.
The conclusions drawn by actuaries appointed in the past are suspect and not only because of insufficient data on the members. The fund available has so far been calculated on the basis of an average return of eight% a year; the returns have actually always been higher than this, even reaching 9%, sources in EPFO say. The fresh actuarial review would do a sensitivity analysis of the fund, based on returns ranging from eight to 9%.
There is also a problem with the calculation of pension, based on salary drawn in the final year of service; it appears these do not, uin many cases, match contributions to the fund made by a member. The review would take another look at this, sources said, going into the final three years of pay drawn.
The pensionable period is another issue the actuary is to examine. Currently, a member getting a pension for 25 years of service is given a bonus of two years; that is, his or her pensionable period is calculated as 27 years. This again burdens the retirement fund. The actuary is to go into both these anomalies, sources said. The correct estimation of salary is estimated to save the fund close to Rs 5,200 crore. Doing away with the bonus would lead to an addition of close to Rs 14,900 crore.
And, if the rate of accrual changes from eight to 9%, there will be an additional inflow of Rs 18,000 crore. The three, in sum, should yield an additional Rs 38,000 crore. Whether the government then wants to implement the corrections to streamline the scheme would be left to it, sources said.