Behind the closed doors of Central Board of Trustees (CBT) meeting at Employees’ Provident Fund Organization (EPFO), a unified front of officials (representing Employers, Employees, States and Central Govt. officials) rejected Labor Ministry’s proposal to reduce the EPF contributions from 12% to 10%. This has evoked very passionate responses across the board. It is not surprising at all given the impact this proposal has on ‘cash in hand’ component of every employee and the mandatory outgo for every employer. A cursory look at the media coverage, blog posts, tweets and you know the battle that is brewing up. All those who think about this as a passing turbulence, need to think again. For those who care about this subject, this is an indication a f fundamental shift of power between employee, employer and regulatory/administrative agencies. 

Here is a look at what every involved party must be thinking.

Let’s start with Government. Clearly, it believes in the efficiency of administration and accountability. The reforms were undertaken as well as those lined up indicate an effort to make things easier, accessible and broad based. The current proposal to reduce EPF contribution from 12% to 10% seems to be driven by following,

1.  There is a push for broadening the base (e.g. taxpayers, taxes, contributors, welfare participants etc). The thinking is “reduce the burden; it reduces avoidance, drives more participation and thus improves collective contribution”. The proposal to reduce EPF contribution is a step in this direction. 

2.  In April of this year, EPFO also considered increasing the wage limit to INR 25,000 from INR 15,000 currently. While there is no decision yet on the same, Atul Gupta, Partner, Trilegal says that “A reduction in the rate of contribution to 10% would have made such an increase in coverage limit easier to accept for corporate India.”

3.  The Economic Survey 2016 also indicated a key point that Labor Ministry seems to have picked up – For low wage earners (earning less than INR 20,000 per month) almost 45% of their salary goes in mandatory deductions. This arguably leaves very little in the hands for these employees for meeting their expenses. The experience of services provided by EPFO has much to be desired, as per the CAG audit findings. This leaves a strong disconnect in the minds of employees on “why should these deductions exist”. The Economic Survey argues that these low wage employees should have the freedom to decide how the deductions should be made. This brings up the case for lowering the burden of contribution. 

4.  The Government also seems to be acknowledging a broader cry from employees to have better cash in hand for their salaried income. The recent adjustments to income tax slabs, various tax incentives/sops offered indicate efforts in that direction. Reducing the burden of EPF contribution will definitely increase the cash in hand. Seems like a winning hand.

 “It was felt that lowering the rate of contribution may facilitate widening the coverage of all employees, as a lower social security contribution rate reduces the incentive for evasion.” says Atul Gupta, Partner, Trilegal.

Unfortunately, there are side effects. This is where we are experiencing a strong push back from both employers as well as employee representatives. Here is how the various representative bodies are thinking.

1.  The employee union representatives are not sure how various employers would react to the reduction of 2% in contribution. It is possible that the overall wages may be reduced by 2%. The employer may not transfer this 2% reduction back to employees through other taxable allowances. This represents a loss for employee group.

2.  The EPF currently acts as a ‘deferred savings’ account i.e. the money is still mine, but I do not have access to it right away for expenditure. It is locked away in EPFO (in a layman’s term). This forces a ‘savings’ habit and helps build a long-term source of money after retirement or in an emergency. This has become very relevant today when the outlook for economic activity is cautious. By reducing the contribution, Government is actually converting this ‘savings’ into a ‘disposable income’. The act was set up with this “savings approach” in mind. Without appropriate awareness and communication, this intent will be lost leading to social consequences. 

3.   The “One rule fits all” approach of Government does not truly represent the complexity of employee expectations. At low salary levels, employees prefer more cash in hand to meet daily expenses. At higher salary levels, employees prefer to build a corpus for a life after retirement. The preferences change based on tenure, earnings, lifestyle and liabilities. 

4.  Another real possibility is that the early stage employers may not care about the long-term sustainability of their employees. They may not be interested in employee welfare and could merely pursue a profit motive. The role of most representative bodies is it to protect the downside, rather than support risk taking. It is a much-needed balancing loop.  

More debate will follow in coming weeks. Much of that will be focused on being more informed and thinking through implications. 

“From a global standpoint, most countries are struggling with an aging population coupled with a lack of robust retirement systems.  A recent report by Mercer on the Global Pension Index (MMGPI) that represents the adequacy, sustainability, and integrity of a country’s old age pension system indicates that India improved its scores from last year due to various measures; an important one being an improvement in the net replacement ratio due to changes that allowed NPS contributions through a separate section of the IT Act.  The reduction in EPF contribution to 10% would have been counterproductive from this perspective.” Preeti Chandrashekar, India Business Leader – Retirement, Health, and  Benefits, Mercer

As we stay tuned because this is important for both employers and employees, Atul suggests that “from extensive amendments to the existing enactment to the most recent social security code mooted by the government, it is difficult to predict what direction PF legislation and administration will ultimately take in the coming few years.” Preeti continues that, “In the long run, one would expect more parity and consistency across various retirement schemes that are available for people in terms of tax incentives, investment patterns and returns.”

“The investment pattern of EPFO is conservative with very minimal exposure to instruments other than debt. It is high time the portfolio is expanded to optimize the earnings for the members. Of course with adequate safeguards.” says, Madhu Damodaran, Co-Founder, Simpliance.

So, where does this leave the HR fraternity, Rewards professionals, and Senior Leaders? It really asks you to take time off to think through some important questions. The cry of ‘needing more cash in hand’ is not new. You have heard that before. There will be renewed interest in this topic with the coverage in media. Employees will be talking among each other and soon will be reaching out to you for a conversation. You are better off being prepared for this conversation and tune in, rather than swept it away. The important questions are,

1.  What is our point of view on retirals contribution? 

a.  Do we own it or does an employee own it or should it be a joint responsibility? 
b.  Should employees decide their strategy or should we be leveraging our scale to help them? 
c.  Should we do more or simply abide by regulations? 
d.  If we let employees decide, how would we administer it? 
e.  What needs to change?
2.  How would we implement a reduction in contribution? 
a.  Would we simply add 2% back in other allowances or should we take it off completely? 
b.  Should we be “compliant” or “progressive”? 
c.  What’s our opportunity to create a compelling employee value proposition or employer brand? 

2.  Where is our action plan based on various scenarios? Should we plan proactively or should we wait and watch? What impact it has on my workforce and on my budget?

a.  What is the wage limit is extended to INR 25,000?
b.  What if the contribution is reduced to 10%?
c.  What if we restrict the contribution to max limit allowed under the act (12% of INR 15,000), rather than going above it? How do we seek exception from EPFO?
d.  Should we communicate our point of view with our employees? 

All these and more will be coming. The debate will take its course. However, this is a golden opportunity for the organization to clarify its philosophy and standing.