Pension is Deferred Wage, not a Charity

       The pension of the private sector employees will shoot up under the Employees’ Pension Scheme (EPS), thanks to a Supreme Court ruling which has dismissed a Special Leave Petition filed by Employees Provident Fund Organisation (EPFO) against the judgement of the Kerala High Court. The High Court had asked the retirement fund body to give pension to all retiring employees on the basis of their full salary, rather than capping the figure on which contribution is calculated at a maximum of Rs 15,000 per month. All employees in the organised sector currently contribute 12% of their salary (basic salary dearness allowance) to the EPF. The employer makes a matching contribution, of which 8.33% goes to the EPS.

      Back in March 1996, the EPS Act was amended to allow members to raise the EPS contribution to 8.33% of their full salary (basic + DA) provided the employee and employer had no objection, thereby doing away with the cap on salary. This raised the pension amount exponentially. But in 2014, the EPFO again amended the Employees’ Pension Scheme to increase wage ceiling for coverage to the current cap. Thus, the new employees having salary exceeding Rs 15,000 per month were not eligible to become members of the EPS, while existing employees who were members of the EPS as on September 1, 2014, had an option to contribute on a higher salary. For this purpose, they needed to place a joint request along with their respective employers by a specific deadline, which has now been done away with by the Supreme Court.  Moreover, now the pensionable salary would be calculated as the average of the last five years’ monthly salary, and not 12 months as per earlier norms, which was responsible for reducing the pension of many employees.

      This order of the High Court has been welcomed by millions of employees across the country.  As a result of this ruling an employee who presently gets a salary of Rs. 50,000/- and has completed 33 years of service would be entitled to get Rs. 25,000/- per month while earlier the worker could get only Rs. 5,118/- per month. Similarly, an employee getting a salary of Rs. 1,00,000/- per month and if he or she has completed the service of 25 years, he or she would be able to get the pension of Rs. 38,571/- per month while the pension before this order was payable to him or her was Rs. 3,420/- per month which is very low. Thus, such an employee would be an increase of 1026 per cent. It may also be noted here that earlier the Hon’ble Supreme Court of India in ‘Regional Provident Fund Commissioner of West Bengal vs Vivekanand Vidya Mandir and others’ had ruled that all allowances including the Special Allowances would form part of the salary.

    The Act provides for the formulation of a Scheme for the creation of a Provident Fund Account in the name of each employee of a covered establishment. The fund was to be constituted by depositing an employee’s share at the rate of 12% of the basic wages including Dearness Allowance. The employer has also to contribute an identical amount, which together would constitute the Provident Fund. Initially, the Act did not provide for the creation of a Pension Fund or for the payment of pension. Later on, Section 6A was inserted, authorizing the creation of a scheme for the purpose of providing pension to the employees. Accordingly, the Employees’ Pension Scheme, 1995 was framed. As per the said scheme, the maximum pensionable salary was Rupees six thousand five hundred per month and contributions to the pension fund were to be made only on that amount. The corpus of the pension fund was to be constituted by transferring 8.33% out of the employer’s contribution under Section 6 of the Act. As per the scheme, the maximum pensionable salary was initially fixed as Rs. 5000/- and was later on enhanced to Rs.6500/-.In the above circumstances, the pension scheme was amended with effect from 1st September 2014. The pensionable salary was altered to mean the average monthly pay drawn in any manner, including on a piece-rate basis, during the contributory period of service comprising a span of sixty months preceding the date of exit from the membership of the pension fund.

   The High Court said that the intention of Parliament in framing the PF Scheme was to secure the rights of the lower wage earners. The said object was being defeated by the action of the employees paying contributions above the ceiling limit. The situation created was one of reverse subsidization. It has also disturbed the fund base of the scheme which in turn was found to affect the rights of the lower wage income group who receive a pension. It was in order to safeguard the interests of the said lower income group that the amendments were brought into force. The authorities are clothed with sufficient powers to amend the scheme, which power has been exercised considering the larger interests of the working class.

     The division bench of the High Court, however, said that ‘we have considered the respective contentions advanced by the counsel on either side.  In many of the cases, the validity of Section 6A the amendments was challenged. The industrial revolution that brought about drastic changes in the structure of our society created a large and distinct section of people, the industrial workers. The large industrial establishments that started springing up all around, required the services of workers of various categories. They came in large numbers from the rural areas in search of better salaries, better living conditions and better career prospects. They settled down close to the industries spurring the growth of urban settlements, that later developed into our cities. Such workers, when they became old and infirm were found to be left with no income or means of sustenance. In view of the obligation in the Directive Principles, to ensure social justice to one and all, the State had to find some means to ameliorate the conditions of the old and infirm industrial workers. Taking into account the fact that the financial resources at the hands of the State were limited, an alternative method of constituting a fund with contributions extracted from both the employers and employees has been statutorily put in place by the EPF Act. The Provident Fund so created is made up of the contributions of both the employers and employees, with no contribution from the State Exchequer.

   The contention as raised by the EPFO was that payment of pension computed on the basis of the contributions made on their actual salaries by the employees would deplete the Pension Fund and would make the Scheme unworkable. The above contention, the High Court ruled, cannot be accepted as a legal and valid ground for scaling down the quantum of pension that the employees are entitled to receive, as per law. The Pension Fund is constituted by transferring 8 1/3% of the employer’s contribution to the Employees Provident Fund without making the employees liable for any further contribution. The aim of the Pension Scheme was to ensure to the benefit of all the employees who were covered by the Employees Provident Fund Scheme.

   It cannot be disputed that the workforce in our country has only been growing in numbers with more and more establishments springing into existence and getting covered by the provisions of the EPF Act. The contributions paid by them on the basis of the actual salaries drawn by the employees are constantly adding to the base of the fund. Such a process of accretion is a continuing phenomenon. Therefore, there is no evidence of the fact that the fund is getting depleted by the payment of pension. It is commonly accepted that the fund base has only grown over the years by the accumulation of EPF contributions. India is a country with a large number of people living on the margins of subsistence, compared to whom an organised sector worker, even if lowly paid in relation to corporate executives or civil servants, is relatively well off. The Court has said that Pension is not a charity, but it is like deferred wages to help the employees in their old age. Government funds should be spent on healthcare, education or women’s empowerment, all of which have been identified as yielding high social returns.

   There is another side of it that what proportion of an employee’s earnings should mandatorily be saved is an issue for rational analysis, not arbitrary court orders. No employer is going to raise what it costs the company to hire a hand, merely because a larger proportion of that cost is mandated to be saved. All that will happen is that the take-home pay would dip. Whether an employee, at low levels of earning, would be better off by depressing current consumption to save for the future is for the employee to decide. Now it is the Supreme Court’s order that will have the final say.