Employer's payment on account of salary would go up by 2.6 pc

Ambarish Mukherjee

Bigger payout


Suggestion to

raise vesting age of pension to 60

Fund to

be parked with EPFO to go up by 5.4 pc

8.33 pc

of total collection goes towards pension scheme

EPFO could

run into deficit on pension scheme

Labour leaders

want greater Govt contribution

New Delhi, Dec 21

In a move that could result in around five per cent overall increase in mandatory annual savings of the salaried class and employers forking out around 2.6 per cent more towards employee cost, the Employees Provident Fund Organisation (EPFO) may recommend to the Government to increase PF contribution rates from the existing 12 per cent to 15 per cent.

EPFO has around four crore subscribers and a corpus of close to Rs 1.5 lakh crore.

As of now, 12 per cent of the employee's basic pay goes towards the provident fund account and the employer matches the contribution.

So, for every Rs 100 an employee earns, the employer pays Rs 112, of which 21.42 per cent is parked with the EPFO.

The increase would mean that the employer's payment on account of salary would go up from Rs 112 to Rs 115 or an increase of 2.6 per cent, while the fund to be parked with the EPFO for every Rs 100 earned would go up to Rs 30 or 26.81 per cent, an increase of 5.4 per cent.

According to sources, to formulate the recommendations the Central Board of Trustees (CBT) has taken into account suggestions made by labour leaders who are critical of the way PF funds have been handled, which has resulted in reduction in interest rates.

The proposal on a hike in PF rates had been put forward by trade union leaders who are members of the CBT.

However, no final decision has yet been taken on the issue, said one of the members.

The move comes particularly in response to the need to meet the increasing actuaries valuation deficit in the Employees' Pension Scheme 1995 run by the EPFO.

Out of the total provident fund collection, 8.33 per cent goes towards the pension scheme, with the Government contributing another 1.16 per cent of the salary towards this pension account.

According to the EPFO's internal estimates, it would soon run into a deficit on the pension scheme just as it had in maintaining EPF interest rates.

The other suggestions likely to be made include increasing the vesting age for pension from 58 to 60.

However, this would be without applying the reduction factor if pension is claimed at the age of 58 years. Simultaneously, labour leaders have also suggested an increase in the Government's contribution.

The EPFO had been reducing interest rates over the past few years to reduce the gap between its interest earnings and interest liabilities.

Like the provident fund, the pension fund is also parked in low-interest Government securities and is unable to match the pension liabilities.

By altering the pension age from 58 to 60, liabilities could be pushed back by two years, while more funds would be accumulated, according to a member.

(This article was published in the Business Line print edition dated December 22, 2006)
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