higher eps pension: Will higher EPS pension dream collapse due to EPFO’s new calculation rules?

Applicants for higher pension under the Employees’ Pension Scheme (EPS 95) may be in for a rude shock as there have been media reports that the EPFO is promoting a new rule to calculate the higher pension. The purported rule is based on giving higher pension on a pro-rata basis, which is likely to result in 30% to 40% lower pension for EPS-95 members.

“As per the communication from the EPFO (Employees’ Provident Fund Organisation) offices in various places, it is true that the service period of an employee who has opted for higher pension is split into two parts,” says PV Murthy, Head of Labour & Employment Practice, Economic Laws Practice.

However, the EPFO has not issued any communication or a circular in this regard. “The EPFO has not given any official confirmation about the new methodology for calculating the new EPS pension. The pro-rata pension computation was not explained in a circular or released by the EPFO,” says Manmeet Kaur, Partner, Karanjawala & Co.

How will the pro-rata calculation of higher EPS pension work?

This new rule of calculating pension will primarily affect members who are still working or retired on or after September 1, 2014. The service period of these people will be considered in two parts for calculating average pensionable salary. “The first part from 16.11.1995 (the date of implementation of EPS-95) till 31.08.2014 and the second part commencing from 01.09.2014 till the date of retirement,” explains Murthy.

“For the first part, the average salary for the last 60 months is being reckoned for the calculation of pension and for the second part, the average salary for the last 60 months or the average salary from 01.09.2014 till the date of retirement, in case the date of retirement is before 31.08.2019, is being reckoned. The pension payable is, therefore, prorated by splitting it into two parts,” says Murthy.

Also Read: How to avoid EPF withdrawal claim rejection

How will this new calculation rule impact the members’ pension?

Till August 31, 2014, the EPS contribution was allowed only till the maximum wage ceiling, which was Rs 6,500. It was raised to Rs 15,000 from September 1, 2014. After this date, the maximum EPS contribution for new members was capped at the new wage ceiling of Rs 15,000 and a limited window for applying for higher contribution on actual salary was allowed to old members. This led to EPS members approaching various courts and the matter ultimately reached the Supreme Court which ruled in favour of all these old members and said that they were eligible to apply for higher EPS pension.

However the new calculation rule on pro-rata basis is likely to reduce the pension amount significantly. Since the wages before September 2014 were low, the average pensionable salary for the first period is likely to be very low for most people. If this pensionable salary is factored in on a pro-rata basis to calculate the final EPS pension, it will bring down the overall pension.

“The above approach adopted by the EPFO may result in a reduced pension of anywhere between 30 and 40% than what was contemplated by the judgement of the Supreme Court,” says Murthy.

Is it not against the spirit of the order passed by SC in this regard?

Any differentiation based on an arbitrary cut-off date appears not to be in sync with the line taken by the apex court while giving its verdict on higher EPS pension. “The Supreme Court had held that the cut-off period imposed under the amendment for exercise of the 2014 option was not valid,” says Kaur.

The SC judgement had restored the right of all eligible members to have an opportunity to apply for higher pension. “In my view, the above prorated approach adopted by the EPFO for calculation of higher pension is not in line with the spirit of the SC judgement,” says Murthy.

However, the current move by the EPFO appears to be aimed at reducing the pension amount in an indirect way by altering the pension calculation rule. “The EPFO might have been constrained to come out with this innovative approach since they may not have sufficient corpus to make the payments,” says Murthy.

What is the recourse left for members?

If the purported rule is applied to all members who have applied for higher pension, then it will be contrary to their expectation with which they applied for the higher pension. “Those who opted for higher pension are expressing concerns as the actual pension they receive will be much lower than what they anticipated,” adds Murthy.

The EPFO is yet to notify the new calculation rule. It is of utmost urgency that the EPFO clear the doubt among the members who have applied for higher pension. “In case the new methodology, as and when notified, puts retirees at a disadvantage, the retirees may challenge the same before appropriate legal forums, including the Supreme Court,” adds Kaur.