Now that the government has decided to move towards a new pension scheme based on privately-run pension fund managers running individual pension funds with a regulator (the PFRDA) to supervise them, it's time for it to think of a few more modifications other than those suggested by the Standing Committee of Parliament, which just cleared this.
Namely, do we need to do away with the government-owned and -run Employees Provident Fund Organisation, and transfer all relevant balances to the new pension fund managers?
While most will be aghast at the suggestion, considering there are supposed to be around 3.95 crore 39.5) individuals who've got their savings with the EPFO, the EPFO has been an unmitigated disaster as far as its principal charter is concerned, that of providing old-age security.
By the way, we're not even talking of the fiscal problems that giving a higher than market interest rate poses; the failure of the EPFO is a lot more basic.
For one, while there were 3.95 crore EPF members in 2002-03 (the EPFO comprises the EPF and the Employees Pension Scheme, or the EPS), these represent under 10 per cent of the country's labour force.
Of these accounts, 1.76 crore (17.6 million) are inoperative, bringing down the effective number of EPF accounts to 2.19 crore (21.9 million), which is around 5 per cent of the country's work force. Of the total membership, around 75 per cent have less than Rs 20,000 in their accounts.
This, of course, is the current balance while what matters is the balance on retirement --the average payout for retirees was Rs 57,664 in 2002-03, an amount enough to give you an annuity of a measly Rs 331 per month.
In other words, the EPFO's members cannot possibly hope to even subsist on their savings with the EPFO. Which is also why, less than 4 per cent of the withdrawals during 2002-03 were from people who'd retired; the rest simply took out their money out before they retired.
This low balance is not just because people have low salaries and contribute small amounts to the EPFO. It is because they don't stay on with the EPFO each time they change jobs or cities, since it takes a long time to transfer accounts -- even with the below 2 per cent annual returns the EPFO provides, if people were not allowed withdrawals and were to continue with the scheme till retirement, they should retire with a balance of Rs 575,000, or ten times the current retirement balance.
In the case of the Employees Pension Scheme, which claims to have 2.75 crore (27.5 million) members and promises to give them half their salary (average of the last year of work) after retirement, it has a shortfall of Rs 22,000 crore (Rs 220 billion) -- a little under 85 per cent of the exits during 2002-03 were also by people who simply decided to opt out.
Apart from the fact that very few people are going to be able to live their post-retirement lives despite the fact that they pass on 24 per cent of their income to the EPFO (12 per cent contribution from the employee and a matching one from the employer), the other danger is that of serious fraud. And this is beside the possibility that the EPFO will go bust.
In 1996, the first year after its launch, the EPS had a surplus of Rs 1,689 crore (Rs 16.89 billion), but with real interest rates falling while the EPS' pension-payment commitments kept rising, it had a gap of Rs 19,291 crore (Rs 192.91 billion) in 2002-03 and this rose to Rs 22,000 crore (Rs 220 billion) in 2003-04.
On the face of it, the government has to make good the pension payments even if it has to dip into its own coffers, but when the UTI went bust, everyone took a hit, including retired senior citizens.
There's no reason to believe this won't happen with the EPS. But it's not just in the EPS that there's a problem. There's a serious accounting problem with the EPF part of the EPFO as well.
According to internal documents of the EPFO, it had Rs 8,313 crore (Rs 83.13 billion) in the "interest suspense account" in 2002-03, of which Rs 2,360 crore (Rs 23.6 billion) was brought forward despite not being reconciled in appropriate accounts -- this, the EPFO document says, "is not reliable and is more or less an ad hoc and arbitrary figure that does not reflect the true position of balance in interest suspense account".
The balance sheet of 2002-03, the document goes on to say, shows Rs 684.56 crore (Rs 6.85 billion) as Unclaimed Deposits -- yet, it says, "the computerised database from the 106 EDP centres reflects Rs 8,071.66 crore (Rs 80.72 billion) as UCD". This UCD, of 1.76 crore (Rs 17.6 million) dormant accounts, the EPFO acknowledges, has "been a continuing source of frauds. Unscrupulous persons have in the past forged documents for withdrawal with the connivance of EPF staff, bank employees etc."
By the way, the EPFO balance sheet for 2002-03 said the payout during the year was Rs 5,506 crore (Rs 55.06 billion) whereas the annual report says it was Rs 6,621.34 crore (Rs 66.21 billion)! The UTI will look like a children's picnic by the time the EPFO explodes.