Why the Employees' Pension Scheme (EPS) is a scam?

Whatever I write below is applicable only to employees of Private sector in India ( including IT and BPO employees ), since Govt. companies have their own separate pension fund ( as far as I know ).

Employees' Pension Scheme (EPS ) is operated by EPFO http://www.epfindia.com/ , the same organisation which handles your Provident Fund( PF ) as well.

12% of your Basic salary goes to EPFO.An equivalent amount is contributed by your Employer as well i.e. in total 24% of your basic salary goes to EPFO.

This amount ( i.e. 24% of your basic salary ) is allocated into different accounts as follows:
1. EPS - 8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541/- (i.e. 8.33% of Rs. 6500 )
2. The rest of the amount goes into the PF account.

An example of this allocation can be found in this file.


You earn certain % of interest on the amount in your PF account. The rate of interest is decided by the Board of EPFO. Whatever is the amount accumulated in this PF account by the time you retire, you receive that as a lump sum.

But we are only interested in what happens to the amount deposited in the EPS account. The amount accumulated in your EPS account is paid back to you as a monthly pension after you retire.

Now it's time for some serious number crunching, here we go:

Ram joins a company at Age 25, works there for 35 years and retires at the age of 60.Let's assume his basic salary was Rs. 10,000/- from the beginning of his employement to his retirement.
Since his basic salary was greater than Rs. 6500/- the amount that went towards EPS was Rs. 541/- ( the EPS rules place a cap on the maximum basic salary which is used to calculate your contribution and your monthly pension )

After retirement his monthly pension would be calculated using the below formula:
( Pensionable salary X Pensionable service ) / 70

Here,
Pensionable salary = Rs. 6500/- (remember, EPS rules place a cap on basic salary )
Pensionable service= 35 years ( the number of years he was in service, and contributed to EPS )

So, the calculation yields.
( 6500 X 35 ) / 70 = Rs. 3250/- ( Ram's monthly pension )
i.e. his annual pension is Rs. 39,000/-

So now we need to calculate whether Ram got a fair deal. Whether this monthly pension paid to him was just?

Let's use a recurring deposit calculator, to estimate how much he would have accumulated in his EPS account by the time he retires. We assume a conservative rate of interest 8%

It would be Rs. 12,49,263/-
To calculate:
1.Go to this link
http://www.teacherone.com/Business/recur_deposit/recur_deposit_maturity_calculator.php
2. Enter amount as Rs. 541/-
3. Frequency of deposit: Monthly
4. Rate of interest: 8 %
5. Duration: 420 months ( 35 years X 12 months )
6. Press "Calculate Maturity amount" button. You will get 12,49,263

There are annuity ( i.e. immediate payment of pension ) schemes offered by public and private life insurance companies. Let's take LIC ( a govt. owned life insurer ).
It offers a scheme known Jeevan Akshay which is an immediate pension plan.
http://www.licindia.com/jeevan_akshay_plan_009_features.htm
A PDF printout of the page in this link is here.
Observe the table on top of Page 2 of this PDF file.
For Rs. 1 lakh price, anyone retiring at age 60 can get a annual pension Rs. 9350/- ( constant and guaranteed for his lifetime )

Since Mr. Ram has Rs. 12,49,263/- with him ( I am assuming that the amount accumulated in his EPS account is given back to him on retirement, but as per the rules this does not happen ), let's calculate how much annual pension he can get from LIC. We use the premium calculator available on LIC's website to do this.
1. Go to this link. http://www.licindia.com/premium_calculator.htm
2. Choose Jeevan Akshay from the drop-down.
3. Press on 'Select Product' button.
4. Enter date of birth as 31/12/1947, so that he is 60 years today.
5. Enter purchase price as 1249263 (the amount accumulated in Mr. Ram's EPS)
6. Annuity type is" Annuity payable for life"
7. Annuity mode is yearly.
8. Press on Calculate premium button.

The annual pension is shown to be Rs. 1,21,803/-
This translates into a monthly pension of approx. Rs. 10,000/-

What a scam!!!
A person who deserves a monthly pension greater than Rs. 10,000/- is paid only peanuts ( Rs. 3250/- ) by the EPFO.

This is a scheme by the Govt and for the Govt, to cheat people of their retirement money. Anybody who has the option to take money out of EPS scheme and purchase annuity on his own, will get three times the pension he gets from EPFO.

PS: EPS rules can be found at this link
http://www.epfindia.com/Circulars/EPS95_update102008.pdf

Disclosure: I am not an accountant or CA and the above calculation is as per my understanding of the EPS rules. I am writing this post so that an qualified CA can comment on the above, whether my concerns are genuine. If you know a CA or accountant, please pass this blog post on to him and ask his opinion on it.