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LATEST NEWS UPDATES | World Bank urges India to make PF must for formal staff-Vikas Dhoot

World Bank urges India to make PF must for formal staff-Vikas Dhoot

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published Published on Jun 22, 2012   modified Modified on Jun 22, 2012
-The Economic Times

The World Bank has urged India to make provident fund membership compulsory for all formal sector staff and urgently raise the 6,500 wage ceiling for mandatory PF contributions - which at present is even lower than the minimum wages in most states.

The Bank has also advised to reduce the threshold for bringing firms under the Employees' Provident Fund (EPF) net from 20 staff to 10, dismissing finance ministry fears that bringing more workers into the retirement fund could aggravate the deficit in a pension scheme offered with EPF and create contingent liabilities for the exchequer.

The finance ministry had sought a special study with the World Bank's help to assess the position of the Employees' Pension Scheme (EPS). Introduced in 1995, the Rs 1.4 lakh-crore EPS was estimated to have run up a Rs 54,000 crore deficit by 2009, leading to the ministry's intervention.

The World Bank-aided study of the scheme, completed recently, said there was no deficit in the the EPS and it could be sustained till 2075 with a Rs 500 hike in the EPF wage ceiling every five years. Top EPF officials including Central PF Commissioner RC Mishra recently visited the Bank's Washington headquarters to ascertain the reliability of these findings.

The Bank's top social security experts validated the study and said the 'base deficit' estimate of around Rs 12,000 crore in the EPS roughly matches the Bank's calculations. But this deficit was 'insignificant' in view of the scheme's size and adding more workers to the EPF net would make the pension scheme more robust, the Bank's experts told Indian officials.

"...There is need to make the membership compulsory for all the employees working in the covered establishment," the Bank has said, according to an internal government report on the World Bank review accessed by ET.

"...If assumptions are even slightly modified, the (Rs 12,000 crore) shortfall turns into a surplus. Reducing the threshold limit from 20 to 10, assuming the age profile remains the same, will have no significant negative effect," the Bank has said.

The Bank has also asked India to urgently raise the wage ceiling and the pensions paid out under the EPS so that workers don't retire in penury. "Even though the scheme appears to be sustainable as on date based on existing rules, there is an urgent need to index the wage ceiling and pension, if a meaningful replacement old age income is to be ensured," it said.

As the only formal social security system for Indian workers, the Employees' Provident Fund (EPF) covers just about 10% of the 400 million-plus workforce. The monthly wage ceiling for statutory EPF coverage hasn't been revised since 2001 while the 20-staff threshold was set in 1952, when Parliament ratified the EPF Act.

The archaic norms mean that most new workers are now excluded from EPF coverage, thanks to paradigm shifts in the labour market such as higher creation of jobs in SMEs. With minimum wages also crossing the Rs 6,500 monthly ceiling, exclusion from the EPF net is now the norm for even the weakest sections of workers.

Three years ago, the labour ministry decided to expand the EPF's reach by raising the wage ceiling to Rs 15,000 per month and reducing the threshold for firms to 10 workers. But the plan has been on hold after the finance ministry intervened. Now, the clarion call for expanding EPF net could change the status quo.

The Economic Times, 22 June, 2012, http://economictimes.indiatimes.com/news/economy/policy/world-bank-urges-india-to-make-pf-must-for-formal-staff/articleshow/14328192.cms


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