Before the switch

| Updated on October 14, 2019


After slipping in a proposal to allow subscribers to the Employees Pension Scheme (EPS) to switch to the National Pension System (NPS) in its recent Draft Social Security Code, the Centre now appears to be having second thoughts. The idea is said to have drawn vociferous protests from workers’ unions even as it found support within the EPFO. There are three good reasons why workers’ unions may prefer EPS to the NPS for their post-retirement social security net.

One, with the phasing out of guaranteed pensions since January 2004, EPS 1995 remains the only government-run scheme that offers organised sector employees in India a defined benefit on retirement. The Employees Provident Fund as it stands today, merely allows employees to accumulate a corpus towards retirement without solving the pension problem. Under NPS, one’s pension payouts are wholly dependent on how market forces shape one’s portfolio. Two, the EPS is a simple scheme where 8.33 per cent of the employers’ contributions are automatically appropriated to set up a fixed pension post-retirement. The NPS, in contrast, is a complicated vehicle requiring employees to choose from multiple plans, assets, fund managers and annuity providers,before it provides a pension. Three, the unfriendly tax treatment of NPS withdrawals and annuity payments also works against it. Expecting lower income employees to give up the comfort of a guaranteed pension to migrate to the NPS is therefore a tall ask.

If the Government is looking to reduce its assured pension obligations under the EPS, it would make sense to target more affluent employees for the switch to NPS by offering this option only to employees with incomes beyond a certain cut-off. This move must be communicated well, by properly showcasing the higher return potential of NPS and simplifying the NPS architecture. The EPS also needs to revisit its archaic cap of Rs 1,250 per month on contributions to provide a more meaningful pension to low-income workers.

Published on October 14, 2019

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