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Suresh Krishnamurthy

The Supreme Court verdict upholding the validity of employee pension scheme needs to be welcomed. Given the sharp fall in interest rates, the scheme's benefits appear attractive compared to how they looked when the scheme was launched in 1996.

THE Supreme Court verdict upholding the validity of the employees pension scheme, which was introduced in 1996, is a blessing in disguise for a section of the employees covered by the scheme.

The scheme was challenged in 1996 stating that benefits under the scheme were disproportionately low compared to the contributions by employees. However, with returns declining sharply now, what was true in 1996 is no longer valid. Developing a fund to provide similar benefits may prove to be a tough, if not impossible, task now.

For a section of employees, the benefits are actually quite attractive. This is especially so who are likely to put in service of 20-25 years. The returns are even more attractive for employees who have put in about 20 years of service.

For employees putting in 30 years or more, the returns offered by the scheme are indeed low in comparison. However, the scheme holds value, even for such employees.

For one, if they live for more than 20 years after retiring, the return generated by their contributions will increase sharply.

Besides, a value has to be attached to the insurance component embedded in the scheme. These factors make the scheme valuable even for such employees.

EPS benefits: A diversion of the contribution of the employee to the provident fund is the source of the corpus for the pension fund.

In the case of a person receiving basic salary and dearness allowance of more than Rs 5,000, the contribution is restricted to Rs 416 per month.

This contribution makes him eligible for receiving pension after reaching the age of 58. The pension is in the form of an annuity.

Employees have a few options before them. They are:

They can opt to receive pension till their death, or

They can opt to receive reduced pension with the benefit of return of capital on death, or

They can opt for reduced pension for themselves till they are alive and for their spouse after their death and return of capital on the death of their spouse

Or, they can opt for pension for a fixed period of 20 years and return of capital thereafter.

The attractiveness of the various options will differ in accordance with the health of the employee and their spouse. If the last option is considered, the return works out to about 6 per cent on the employee contributions for a period of 25 years.

If the service is lower at 20 years, the return is significantly attractive, at about 9 per cent. If the service is about 30 years, then the return dwindles to about 4 per cent.

These returns were calculated assuming that contributions fetch a return of 6 per cent. However, going forward, attaining 6 per cent a year for 20-25 years is no mean task.

In addition, one third of the pension benefit can be commuted three years after the pension starts. In this backdrop, the guaranteed pension benefit appears reasonable, even for employees putting in 30 years of service.

Insurance adds value: Employees also need to consider the value of insurance embedded in the scheme. These are:

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SC verdict on EPS — A blessing for employees

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