PENSION DEFORMS

Government has (mis)handled EPF reforms. One step forward, two steps rollback, shows lack of homework, consultation

THE GOVERNMENT’S DECISION on Tuesday to rollback its amendments to the Employees’ Provident Fund (EPF) Scheme should be welcomed. In February, the EPFO had amended the EPF Scheme 1952 to bring about two broad changes. One, it increased the age limit for filing such claims by retiring employees from 54 years to 58. Two, it restricted the withdrawal of EPF funds, and interest earned by them on that, if the claimant has remained unemployed for more than two months — the employer’s contribution could be withdrawn only on maturity. The turnaround, which happened in two stages — first Labour Minister Bandaru Dattatreya declared that the decision was “kept in abeyance” for three months till July 31 and then, later on the very same day, decided to cancel the decision in toto — not only weakens the policy credibility of the government but also exposes serious flaws in the consultative process it undertook before arriving at this decision. To be sure, the government was forced to cancel its decision after widespread protests by trade unions in the country, especially an estimated 1.25 lakh workers, mostly women, laying siege to the industrial zones in Bangalore.

It was clear the revision of EPF norms had hit a raw nerve and evoked even deeper resentment than the episode of the finance minister announcing a tax on EPF withdrawals in the budget speech, which, too, was rolled back within a fortnight. The contradictory statements by the Union labour ministry, on the one hand, and the workers’ representatives on the Employees’ Provident Fund Organisation’s Central Board of Trustees, on the other, show how the government failed to build adequate consensus among the various stakeholders. Denying the government’s version that the February notification was issued at the behest of some trade unions and workers who had demanded restrictions on PF withdrawals, the workers said the notification was a case of “bureaucratic bungling”. Instead, what the trade unions had requested the government was for the workers to be given the freedom to choose between keeping the money with the EPF or withdrawing it.

In 2004, the New Pension Scheme, a defined contribution scheme, was introduced for civil servants, which replaced the defined benefit scheme, for reasons of growing financial strain on the public exchequer. The NPS was expanded in 2009 and 2010 to cover others sections as well. While it competes with the EPF at present, it is perceived as a eventual replacement to the latter. But such a shift, as the protests bear out, has far-reaching ramifications because even though the EPF returns are lower the fund guarantees assured returns as against the market-linked fluctuating returns under NPS. Clearly, there is much at stake and the government must tread carefully, and only after wide-ranging consultations especially when it comes to much-needed reforms in the social safety net.