Employee Pension Scheme (EPS) – How good?

If you have looked at your EPF (Employees’ Provident Fund) details you might have wondered about deduction of Rs. 541 per month from your company’s contribution to EPF.

Here is the explanation:

• Every month you need to contribute 12% of your basic salary to your EPF account
• Your employer also needs to contribute 12% of your basic to your EPF account. But this part is split into two –
  • EPS (Employee Pension Scheme) – 8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541  (i.e. 8.33% of Rs. 6,500)
  • The rest of the amount goes into the EPF account.

EPF & EPS Calculation:

Here is an example of how EPF & EPS is calculated:

Suppose your basic salary Rs. 10,000 per month.

• 12% of basic is deducted from salary i.e. 12% of 10,000 = Rs. 1,200
• 12% of basic is contributed by employer i.e. 12% of 10,000 = Rs. 1,200
• Total contribution to EPFO = Rs. 2,400
• Out of total Rs. 2400, Rs. 541 goes towards EPS (Employees’ Pension Scheme) and the rest i.e. (2,400 – 541) = Rs. 1,859 goes towards EPF account.

Since the basic salary is more than Rs. 6,500, only 8.33% of Rs. 6,500 (i.e. 541) is contributed to EPS.

What is EPF & EPS?

First lets talk about the similarity between both – EPF & EPS. Both are Retirement Schemes compulsory for private company employees (employers with more than 50 employees) and are managed by EPFO (Employees’ Provident Fund Organisation). In case of EPF you get certain percentage interest on your deposits, which are decided by EPFO board every year. Whatever is the amount accumulated in this EPF account by the time you retire, you receive that as a lump sum.

In case of EPS, you get a monthly pension after you retire which is based on a formula. The good thing about this pension is, your wife/dependents continue to get this monthly pension even after your death subject to certain conditions.

How much Monthly Pension under EPS?

The next logical question is how much pension would you get under EPS scheme? It’s based on a formula:

Monthly Pension = (Pensionable salary X Pensionable service) / 70

• Where Pensionable salary is average of last 12 months basic salary with an upper cap of Rs. 6500 and
• Pensionable service is the tenure of your contribution to EPS.

Calculating Monthly Pension Amount:

For e.g. you join a private sector company at the age of 25 and continue working there till retirement at the age of 60; with your basic salary always exceeding Rs 10,000 per month. Here is what your monthly pension amount would be:

Pensionable salary = Rs. 6,500 [even though your basic salary is Rs. 10,000 but there is an upper limit of Rs. 6,500]

Pensionable service = 60 – 25 = 35 Years

So, Monthly Pension Amount = (6500 x 35) / 70 = Rs. 3,250

You would receive this amount of Rs. 3,250 as your monthly pension for your life time and this would continue even after your death to your dependents.

This brings us to the next question –

Is EPFO justified in paying such a small pension for your contribution of Rs. 541 per month for 35 years?

Let’s do some number crunching and get the answers.

Had your contribution not gone compulsorily into EPS, it would have gone to your EPF (or VPF) account and paid to you in bulk at the time of retirement. Assuming a rate of interest of 8.5% for entire tenure of EPF, the monthly contribution of Rs. 541 for 35 years (or 420 months) would grow to Rs.14,14,147.

You can withdraw this amount and invest in annuity options available with Insurance companies for regular income. For simplicity I have chosen Jeevan Akshay VI Annuity plan from LIC (Life Insurance Corporation). Here you can invest lump sum amount and receive fixed amount every month. You can access the premium payment and benefit calculator on LIC website here.

I choose following options to keep the annuity plan similar to EPS benefits:

1. Date of Birth: 01/03/1952 (As you retire at the age of 60)
2. Purchase price (in Rs.): Rs 14,14,147 (the amount that you need to invest in lump sum)
3. Annuity Type: Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant. (Chosen this option to keep it similar to EPS benefit of pension payment to your dependents even after your death)
4. Annuity Mode: Monthly (frequency you want to receive payment)

Once you enter these values and calculate – you would be surprised to know that you are eligible to receive Rs. 9,522 per month as annuity from LIC on your above investment.

This amount is almost 3 times the monthly pension paid by EPS!

What should you do?

Unfortunately there is nothing much we can do as the EPS scheme is compulsory by Government of India for all the members of EPF. But it’s good to be aware how some retirement plans by government are just an eye wash and your money wasted. Its time government & EPFO need to look at EPS & retirement plans and modify them to keep pace with current trends and returns.