No one’s talking of this hole in Govt’s pension pocket: Rs 17,500 crore

EPS: Interest rates fell 14 to 6% in 9 yrs but Govt tied its own hands

Forget the fact that Labour Ministry politics has cost the Central Provident Fund Commissioner his job or that you will be paid just 8.5 per cent this year on the amount sitting in your provident fund account. Forget even the Rs 1,500 crore that the Employees’ Provident Fund Organisation (EPFO) is trying to collect from defaulting employers.

The biggest crisis facing retirement savings in India is playing out so silently that only the EPFO and its actuaries know the true dimensions.

The Indian Express has learnt that the latest actuarial report for the Employees’ Pension Scheme (EPS) shows that, hobbled by the prospect of low returns and mounting payouts, it is staring at an unfounded gap of Rs 17,500 crore.

In the long run, the 2.75 crore EPS members may be left looking for a bailout. The projection has come as a complete shock to EPFO as a previous report had worked out the difference between pension liabilities and EPS assets and said that the gap was a worrying but still manageable Rs 1,400 crore.

But falling interest rates, growing life expectancy and the increasing numbers joining EPS have widened the hole more than ten times. Experts have worked out that the present corpus of Rs 45,045 crore — and the ever-falling returns on it — will not be able to pay for the promised pensions.

‘‘We have no room to manoeuvre and can only count the losses,’’ said one administrator. The scheme, ironically started by Manmohan Singh in 1995 in his avatar as Finance Minister and sometimes called his biggest blunder, suffers from a design fault.

The administrators have no control over its liabilities as it is a ‘‘defined benefit’’ scheme which means the employee is guaranteed a certain pension, regardless of whether there is enough money to pay for it or not.

The assets, too, are more or less beyond their control as employees earning below Rs 6,500 contribute 8.33 per cent of their salary into EPS and the government adds another 1.66 per cent to this and puts the money in a common pool. What shackles the scheme further is the fact that the EPFO is required to invest this money only in government bonds and other AAA-rated bonds. So even the returns are more or less ‘‘defined’’ and leave little scope for asset management.

The nine-odd years during which this scheme has been in operation has seen interest rates fall from 14 per cent to six. But EPFO is still obligated to pay the same benefits to retirees.

‘‘The gap has been calculated at Rs 17,500 crore keeping the current members, assets and returns in mind,’’ said one expert. ‘‘But because there is a mismatch between what has been promised and what EPS can earn, this gap will grow with every new member.’’

The Indian Express has learnt that Mercer, an international pension consultancy, was asked to prepare a report on how the scheme could be tweaked. The matter has been sidelined as the last four meetings of the board of trustees have focused only on the EPF interest rate, ignoring EPS. ‘‘We can’t even invest in equities,’’ said one administrator. ‘‘No one is trying to figure out how we will generate enough returns to pay these pensions.’’ What happens if the money runs out? Can a future government renege on pension promises?

This is not just a hypothetical possibility. It has happened before, not in the Third World but in countries like Sweden and Italy which had introduced defined-benefit pension schemes.

The only other possibility is that the tax-payer will have to pick up the tab. ‘It will be some future finance minister’s nightmare,’’ said one expert. ‘‘The irony is that the Finance Ministry is not even involved in the discussions right now because EPFO comes under the Labour Ministry.’’

Ila Patnaik