Employees who work for organisations that are covered by the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act), are also covered by the Employees’ Pension Scheme, 1995 (EPS). EPS came into effect from November 16, 1995, and envisaged a contribution of 8.33% of reckonable salary, which was capped to a statutory threshold. This statutory threshold has changed over time from Rs. 5,000 per month to Rs. 6,500 per month and to finally Rs. 15,000 per month. Hence, the contribution to EPS, under normal circumstances, does not exceed Rs. 1,250 (i.e., 8.33% of Rs. 15,000). This contribution is taken from the employer’s portion of Provident Fund contribution, i.e., 12% of full reckonable salary.
It should be noted that Paragraph 11(3) of EPS provided an employee with the option to contribute on higher/ uncapped salary, to reap a higher pension on retirement. However, vide Notification No. G.S.R. 609(E), dated August 22, 2014, w.e.f. September 1, 2014, the proviso to Paragraph 11(3) of EPS was deleted. This nullified the choice of an employee to exercise the right to contribute to EPS on higher/ uncapped salary, and subsequently earn higher pension.
Earlier judgements of the Supreme Court, Kerala High Court and Delhi High Court in October 2016, October 2018 and May 2019, respectively, moved towards restoring the option of higher/ uncapped pension. A review petition was also heard by the Supreme Court. Finally on November 4, 2022, a three Judge bench at the Supreme Court passed its judgment in the case of the Employees’ Provident Funds Organisation (EPFO) & ANR. etc. vs. Sunil Kumar B. & ORS etc. This judgement upholds the right of existing employees to opt for higher pension by contributing to EPS on higher/ uncapped salary.
The Supreme Court judgement of November 4, 2022 has an impact on employees and employers.
Our understanding of the different categories of eligible employees is set out below:
| Category | Eligible to opt for higher pension now? |
|---|---|
| Existing employees who had not exercised their option for higher/ uncapped pension | Yes |
| Existing employees who had exercised their option for higher/ uncapped pension under 11(3), even if they had not exercised the fresh option in 2014 within 6 months | Yes |
| Employees who have retired on or after September 1, 2014, with or without exercising their option for higher/ uncapped pension | Yes |
| Employees who retired prior to September 1, 2014, after having exercised their option for higher/ uncapped pension under 11(3) | Yes |
| Employees who retired prior to September 1, 2014, without exercising their option for higher/ uncapped pension under 11(3) | No |
| Employees who joined on or after September 1, 2014, with reckonable salary over the statutory threshold of Rs. 15,000 per month | No |
In the above cases, eligible, existing employees wishing to opt for higher pension, will have to make higher (differential) contributions to EPS over their past service, by redirecting funds from their PF accumulations.
EPS members who opted for higher/ uncapped pension would need to continue contributing 1.16% of reckonable salary for a period of six months. Thereafter, as per the Supreme Court judgement, “…it would be up to the administrators to readjust the contribution pattern within the scope of the statute and one possible solution could be to raise the level of the employer’s contribution in the scheme…”. The judgement further refers to an appropriate legislative change being brought about to this effect.
In the near future, a legislative change would be brought about, where there would be an endeavour to remove the burden of 1.16% contribution from employees and prevent it from being shifted to the Central Government. Also, other amendments may be potentially brought in to provide the option of higher/ uncapped pension to all existing EPS members and to make the EPS more financially viable.
It remains to be seen whether the proposed legislative change would transfer more burden on to the employer, to make EPS more viable. This measure may include increasing employer contribution by 1.16% of reckonable salary, and/ or any other change to improve the financial viability of EPS.
From a systems perspective, employers with exempted provident funds would need to gear up for employees opting to contribute more to EPS. Administration systems would need to be enabled to calculate and distribute monies owed on account of Provident Fund and monies owed on account of EPS. Further, such calculations/ distributions would have to be communicated/ transferred to the EPFO.
At this stage, we would probably need more clarity, post the legislative changes envisaged to make EPS more viable and ensure its continuity.
What we do understand is that there may be many employees who will be eligible for the higher/ uncapped option. For those employees who exercise this option, employers may have to trace reckonable salary from the date of their joining and apply the appropriate contribution rates on a month-to-month basis. While unexempted employers would merely have to communicate these numbers, the exempted employers would have to transfer the necessary amounts to the EPFO and ensure that the credit is made to the correct employees, at the correct levels. Also, employers would need to align their administration systems to being able to implement such option as and when an employee exercises it.
There is a 4-month window from the passing of the judgement, for employees to opt for higher/ uncapped pension. Employers also need to understand the implications, in order to effectively communicate this to their employees and to facilitate the implementation of the same.
From an employee perspective, as things stand today, our initial calculations suggest that opting for EPS may provide better value. Having said that, calculations can differ based on individual circumstances, assumptions about future events, and preferences for lump sum versus annuity pay-outs. As a legislative amendment is imminent in the near future, it is difficult to say by how much an employee would stand to gain in the future by selecting such an option. While we may be able to measure the immediate impact based on the current scheme, the final impact would manifest only after any envisaged legislative changes have been given effect to.
