Is NPS an option in the Compensation and Benefit Structure?
National Pension Scheme introduced the corporate sector program in 2011, which facilitates the corporates (for that matter any form of employer, be it Sole Proprietorship to Cooperative societies) to be able to contribute to National Pension Scheme on behalf of their employees. That is for the first time a benefit scheme where the interfaces between the Employer and scheme provider (NPS) as well as further interfaces between employee and NPS were completely online, with ability to carry the same to future employers.
To top it, employees would gain significant tax advantage as the Income Tax Act allows benefits under NPS.
Yet the corporate employers both in private sector and public sector has been reluctant to offer the scheme to their employees as part of their Compensation and Benefits Plan. Yes there are those exceptions, sadly one is yet to see a major shift towards adopting NPS.
Reluctance stems often from the (mis)understanding of the legally mandated EPF/S (employees provident Fund/pension scheme) under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (PF Law) administered by EPFO.
NPS over and above EPF
The PF law is very clear that an Employer’s liability to pay Provident Fund Contribution to EPFO is limited upto a salary of Rs. 15000/- a month. For example an employee is being paid a PF Wages which is more than 15000/- a month, the Employer by law is required to contribute PF only on Rs. 15000/-. The employee has to match that contribution.
By PF wages legally one means the wage components on which the PF contribution as per law is to be calculated, normally Basic plus Dear Allowances. Controversies towards other wage components being part of PF Wages is a separate discussion.
Normally annual compensation of Rs. 5 Lacs on a Cost to The Company (CTC) basis, the monthly Basic Salary plus Dearness Allowance (therefore PF wages) is likely to be above Rs. 15000. This is assuming that 40% of the CTC is Basic Salary. At 5 Lac Annual CTC the employee is at junior management level, population of such employees is large in any corporate.
In the event an employer is contributing PF as per PF law for all the PF Wages, (i.e., without restricting it to Rs. 15000), the employer while going beyond the requirement of law is also incurring cost of 1.15% as administration charge that is payable to the EPFO. In the CTC concept it is the employee who ultimately incurs that cost.
Consider NPS as that additional option. Employer can contribute to NPS on the amount that is above Rs. 15000 and provide a modern, tax efficient, more focused in securing the old age security, advanced Pension option to an employee.
Even considering an Employer is already limiting his contribution to Rs.15000 a month, NPS as an additional Pension Benefit is an attractive option for an employee whose PF wages is more than 15000. Will not cost a pie additionally to the employer.
What about a fresh entrant to workforce?
These are the days where the first time entrant to the workforce are offered CTCs higher than Rs. 5 Lac an year. Youth IIMs, IITs and the tier 1 engineering/Management colleges and the CAs/CSs.
Their PF wages is most likely above Rs. 15000 a month. Is it mandatorily cover them under EPF. No, the same law that restricts the contribution to only Rs.15000, also excludes employees whose PF wages are above Rs. 15000 and has never been a member of EPF scheme (hence it is applicable only in most cases to fresh graduates hired from campuses).
Therefore, such employees instead be admitted only to NPS and start their journey to securing their old age, to reiterate, on a modern, well administered, employee choice based pension, with investment options suitable at the respective stage in their life rather than being forced by the Employer to contribute to EPF/S.
The 15000 threshold could be increased by the government any time. Already there are discussions within the Government about this being 21000. That might require reworking the limits at which options are provided to the employee, however basic case of introducing NPS is not foreclosed.
Where is India’s Employee/Worker Pension regime heading
The Policy Direction from the Finance Minister’s Budget speech in 2014, that eventually the Employer or Employee or both would be given a choice between EPF and NPS. IF do, should not employers get ready for that by introducing the NPS right now.
While EPFO has introduced technology in its administration of EPF and might clone itself to be another NPS (going by the discussions in media that EPFO is considering Unitising the EPF balances etc), we as a country are headed towards employee choice between NPS and EPF.
Should we wait for that, when employers, can right now structure their social security benefit with NPS in their compensation? Should they wait for Employees to demand NPS.
Is it difficult to administer? Why carry that extra burden?
With the NPS is administered with authorized POPs, and institutions authorized by PFRDA to extent every support in enrolling as corporate to the scheme, enrolling employees, managing their life with NPS etc, all that the employer would have to do is to tweak their Payroll processes and transfer money online to NPS trust. “Extra burden” sounds silly in such a situation weighed against the benefits: taxation but more in terms of securing an employee’s old age and educating him/her to plan for that efficiently.