Will the PF and Pension Contribution Structure Change?

There may be a huge change in the working class’s salary structure in the private sector soon, i.e. in the EPF contribution structure. Labour Ministry’s senior officials have made certain suggestions to the cabinet committee in this regard. 

The cabinet committee has received recommendations that state the advantage of implementing ‘defined contributions’ structure rather than the existing ‘defined benefits’ structure. There is a minimum limit applicable to the pension contribution and can be called ‘defined benefits’. When it comes to ‘defined contributions’ structure, the EPF beneficiaries will receive benefits directly proportional to their EPF contributions.

Reports say that 23 lakh pensioners receive a pension of Rs.1,000 per month, while their PF contribution is less than one-fourth of it. This tradition may be difficult to manage in the future. This is the main reason for recommending to adopt the ‘defined contributions’ structure. 

Also Read: 7 Rules of Thumb for Flawless Financial Planning

Though EPFO’s Central Board of Trustees (CBT) had demanded to raise the minimum pension level to Rs.2,000-Rs.3,000 in August 2019, it was not implemented. This is because increasing the minimum pension to Rs.2,000 will cost the government an additional expense of Rs.4,500 crore. Similarly, increasing it to Rs.3,000 will cost an additional Rs.14,595 crore to the government, which is a lot to bear.

Due to the COVID-19 pandemic, the share market’s EPFO funds have not given the expected results. Therefore, implementing a raise in the pension contributions may be a tough decision for the government. Can the government find ways to manage these shortcomings and stand by the pension beneficiaries by increasing the minimum pension? Let us wait and watch!

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in