Magazine

English Hindi

Index

100 Expected Questions

Prelims Capsule

Economy

Supreme Court order on EPFO

Supreme Court order on EPFO

Relevance:

  • GS3 || Economy|| Banking & Financial Sector || Financial Regulators

Why in news?

  • The Supreme Court has upheld a Kerala High Court judgment against the Employees’ Provident Fund Organisation (EPFO).

The case

  • The Kerala High Court in 2018 had nullified the amendments made to the Employees’ Pension Scheme in 2014.
    • Vide notification dated August 22, 2014; new members who joined EPF after Sept 1, 2014 with a basic salary of over Rs 15000 per month were excluded from the EPS.
    • Existing employees who were contributing on higher salary could continue to do so provided they made fresh applications along with the employer in a year’s time, failing which their contributions would be restricted to the capped wages.
  • The Employees’ Provident Fund is a retirement benefits scheme that was structured to provide financial security to employees of factories and other establishments.
  • The Supreme Court has now upheld the Kerala High Court judgment.

Implications

The notification that has been struck down had amended the then existing EPS and brought into force certain changes effective 1st September 2014.

  • As a consequence certain amendments to how pensions have been calculated will be struck down.
  • With the notification being struck down, the pension calculation may revert to the 12 months’ average basis thereby implying higher pension for employees who have already contributed to pensions beyond the wage ceiling.
    • Pensionable salary, which is the basis for computing monthly pension, based on 60 months average would normally be lower than that based on a 12-month average because most people draw highest salaries near the end of their careers i.e. just before retirement.
    • This notification had therefore lowered the pension for most people.
  • This will create a situation in which those who had a particularly high previously drawn salary and several years of service might see their pension raised by as much as 1,000%.
  • Further, in case an employee now chooses to contribute on full basic pay to get a higher pension in future his pension would be higher not just because of higher contribution but also because of the change in basis of calculation mentioned above.

Concerns

  • Basic objective: This is naturally not in keeping with the ethos of the provident fund, which has always been scaled towards aiding the saving and retirement of those at the lower rung of the formal sector.
  • Legislative over-reach: The Court may well have upheld this regressive order, but the question is where the money to pay these much larger pensions will come from. That question has certainly not been taken into account by the court. Further, this judgment of the SC appears to be an instance of legislative over-reach.
    • The structure of the pension plan, the profitability and sustainability of the scheme, and so on, are questions that are properly determined by the executive.
    • It is the executive that has to decide the proper distribution of subsidies and taxes — and support provided to state-guaranteed pension funds are nothing but a subset of that fiscal decision, which in all countries must remain with the executive.
    • The executive, not the judiciary, is where the trade-offs that determine who benefits from guaranteed pensions should take place.
      • For example, the EPFO system, which is limited essentially to employees in the formal sector, may not be considered the best form of savings, given the small size and disproportionate bargaining power of formal sector employment.
    • It is also entirely the executive’s decision to decide how tax revenue must be spent to ensure greatest justice as long as the fundamental rights are not being ignored. If the executive believes that pensions are a less effective use of tax revenue than, say, health care, that is the executive’s prerogative.
    • The judiciary can naturally not take any of these important questions into account — which is why it is best to allow the executive to make this sort of decision.
  • It is worth noting that the government has already set up a better alternative to the EPFO, which is allowing for high-end savers, namely the National Pension Scheme (NPS). The EPFO accounts should have been migrated to the NPS.
  • Rational analysis, and not arbitrary court orders, should decide what proportion of an employee’s earnings should mandatorily be saved.

Additional info

Employees’ Provident Fund Organisation (EPFO)

  • The EPFO is an organization tasked to assist the Central Board of Trustees, a statutory body formed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 and is under the administrative control of the Ministry of Labour and Employment, Government of India.
  • EPFO assists the Central Board in administering a compulsory contributory Provident Fund Scheme, a Pension Scheme and an Insurance Scheme for the workforce engaged in the organized sector in India.
  • It is also the nodal agency for implementing Bilateral Social Security Agreements with other countries on a reciprocal basis.
  • It is one of the largest social security organisations in India in terms of the number of covered beneficiaries and the volume of financial transactions undertaken.
  • The EPFO’s apex decision making body is the Central Board of Trustees (CBT).
  • On 1 October 2014, Prime Minister of India Narendra Modi launched Universal Account Number for Employees covered by EPFO to enable PF number portability.