In what appears to be yet another move aimed at reducing pension payouts, the Employees’ Provident Fund Organisation (EPFO) is exploring a new pension scheme to replace the existing higher pension system. The move comes amid a series of efforts made to rein in pension outgo under the current framework.

The proposal suggests introducing the new scheme either with retrospective effect from September 1, 2014, or from the date it is formally notified. Under the proposed framework, subscribers will be receiving a lower pension than what is currently available.

Details of the move have emerged through a Right to Information response, which also includes a plan document of the proposed scheme, submitted in December 2024 after a detailed study. The report was presented to the Union Labour Minister, who also serves as Chairman of the EPFO Central Board of Trustees.

Earlier, on January 18, the EPFO had issued a circular declaring the receipt of government approval for extending the pro rata method, which significantly reduces pension payouts, to higher pensions as well. An RTI application filed by Surajit Bhattacharya, seeking clarity on this approval, has now brought the report outlining the proposed new scheme into the public domain.

The RTI reply, received last week, also includes details of approvals granted by an Under Secretary in the Ministry of Labour. The approval covers key decisions such as the calculation of pension on a pro rata basis and the rejection of pension applications from certain PF trusts. However, the Under Secretary’s note also states that any pension reform should be undertaken only after detailed discussions. Although the proposals were submitted over a year ago, there is still no clarity on whether any follow up actions are being initiated in this direction.

The report further notes that if the new system is implemented with retrospective effect, existing higher pension beneficiaries may be given the option either to continue in the scheme or exit it by reclaiming their contributions along with interest. At the same time, the document warns of the possibility of widespread protests from pensioners, a likely surge in legal challenges, and the possibility that the reform itself could come under judicial scrutiny and even be struck down by the courts.

Proposed changes in pension contributions and benefits

Pension Fund Contribution:

1. All members, irrespective of the salary ceiling, will be mandatorily enrolled in the pension fund.
2. The employer’s contribution will continue at the existing rate of 8.33 per cent.
3. The Central Government’s contribution of 1.16 per cent will be earmarked exclusively for funding the minimum pension.
4. Employees will have the option to contribute towards the pension fund on wages above the existing salary ceiling (currently ₹15,000). This additional contribution may be made either through monthly instalments or periodic lump sum payments.
5. Such additional contributions will be maintained in a separate individual account.

Pension Benefits:

1. Pension for mandatory contributions up to the wage ceiling will continue to be calculated under the existing formula.
2. An additional pension will be provided based on extra contributions made, payable at the time of retirement. The accumulated amount may be withdrawn either as an annuity (interest-based payout) or through structured withdrawals.
3. The minimum pension is proposed to be increased from ₹1,000 to ₹3,000. Any shortfall required to support this enhancement will be met using the Central Government’s 1.16 per cent contribution.