The EPFO Conundrum: Mushrooming Members, Weakening Fund Growth

The new stipulation, which generated utmost disquiet, is the requirement that the employees will not be able to touch at least 25 percent of the contributions in their account.

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The Employees Provident Fund Organisation (EPFO) recently overhauled its rules relating to withdrawal from the Employee Provident Fund (EPF) Scheme, which it operates for the organised commercial sector establishments (at least 20 employees/workers in both private and public sectors). Although it liberalised withdrawals, the changes generated a storm. The government/EPFO had to provide elaborate explanations.

The new stipulation, which generated utmost disquiet, is the requirement that the employees will not be able to touch at least 25 percent of the contributions in their account. This condition has been imposed as the government/EPFO is worried about the fact that 50 percent of EPF members have less than Rs 20,000 balance at the time of retirement (75 percent members, less than Rs 50,000), which does not practically amount to anything as post-retirement pension security.

The situation is worse in the case of the Employee Pension Scheme (EPS), the second scheme EPFO operates.

The EPFO informs that 75 percent of EPS members withdraw their entire pension contributions within four years of joining EPS, making them disentitled of any pension, which requires a minimum of 10 years’ contributions.

The Narendra Modi government has implemented many job/employment generation schemes that provide for the government bearing employers’ and employees’ contributions to the EPF scheme. However, excessive withdrawals from the EPFO schemes make both such employment generation and the EPFO schemes meaningless.

What explains the current unhappy state of EPFO schemes? Do EPFO schemes serve the objective of providing retirement security to organised sector workers? Are there any better reform options?

India’s Fragmented Provident Fund and Pension System

There are primarily three classes of employees/workers in India. First, the government and related non-commercial public sector employees. Second, the organised/formal sector employees/workers of the establishments with 20 or more employees, which EPFO regulates and administers. Third, the self-employed persons in own-account businesses and tiny enterprises.

Salary and compensation package of all types of employees (on cost to employer or CTE basis) is meant to take care of their life cycle needs- present as well as future non-working period, which includes bulky though irregular expenditures like for construction of a house, own or children marriage, post-retirement living needs and insurable contingencies.

Government and informal sector employees: The government takes good care of its employees. There are generous pension and provident fund arrangements for employees recruited before 2004, well-provided national pension scheme (NPS)/unified pension scheme (UPS) for post-2004 recruits, and a slew of facilities and insurance arrangements for contingencies.

The provident fund, pension, and insurance schemes/arrangements for informal/unorganised sector workers, though, are the weakest. While there is a plethora of programs, these are poorly designed, fragmented, and badly implemented.

The Public Provident Fund (PPF) scheme is operated by the post offices, and there are many other sector-specific provident fund schemes. There is a major co-contribution scheme—the Atal Pension Yojana (APY), an NPS scheme operated by the Pension Fund Regulatory and Development Authority (PFRDA). The government has initiated, through LIC, three big co-contribution pension schemes—Shram Yogi Mandhan (SYM), Karam Yogi Mandhan (KYM) and PM Kisan Mandhan Yojana (PM-KMY).

There are many health and insurance schemes, including Ayushman Bharat and PM Suraksha Bima Yojana (PMSBY) as well. The fact that there is almost no enrolment in any of the Mandhan Schemes in the last three years, and API per member accumulations are quite insignificant, is a telling comment on their utter unsuitability and uselessness.

EPFO Schemes in a Spot of Bother

The EPFO operates three types of schemes for the organised/formal commercial enterprises.

It runs the EPF—the provident fund scheme—in which employees and employers both are legally mandated to contribute 12 percent of an employee’s salary.

The EPS is a pension scheme for all employees with less than 15,000 pay per month, in which employers’ contribution to the extent of 8.33 percent (out of 12 percent) is diverted. The government pays 1.16 percent of salary as its contribution to the EPS.

The Employees Deposit Linked Insurance (EDLI) scheme provides accident insurance linked to the deposits in the EPF account of the employee, with contributions made by the employers and the government.

The EPF was started in 1952 (EDLI in 1976 and EPS in 1995). Unfortunately, with low monthly salaries (Rs 6,500 up to 2014; Rs 15,000 thereafter), the EPF employees are always on the lookout to withdraw their PF balances at the earliest available opportunity, using genuine and non-genuine reasons. The EPF accounts literally operate like bank deposit accounts.

The pathetic state of the EPF affairs is what forced the EPFO to acknowledge that 75 percent of the accounts have less than Rs 50,000 balance. The EPFO’s move of making at least 25 percent of the contributions beyond the pale of withdrawals is explained by this reality.

This also confirms that most EPF employees don’t treat the EPF accounts as vehicles for building their post-retirement pensionary corpus.

EPS has faced an even worse outcome. About 37 lakh of EPS pensioners (more than 50 percent of total pensioners) get a minimum pension of Rs 1,000 per month only. What quality of post-retirement life such pensions can afford is not difficult to understand.

Rising Numbers, Falling Accumulations

The Modi government initiated quite a few schemes—the PM Rojgar Protsahan Yojana (PMRPY), Atmanirbhar Bharat Rojgar Yojana (ABRY) etc—which paid 12 percent/24 percent EPF contribution to nudge employers to ‘create’ new jobs. The newly launched PM Viksit Bharat Rojgar Yojana also repeats the same job creation strategy.

Crores of ‘employees’ have become EPFO members as a result of these schemes and other measures. However, they don’t stick around. As soon as EPF contribution incentives stop, their actual/paper jobs also disappear.

Those who know the system withdraw their EPF balances, and those who don’t (a good majority) simply forget about their EPF contributions—which, besides adding to massive unclaimed balances of EPFO, also keep EPF numbers highly inflated. In 2023-24, of about 30 crore EPF members, active contributors were only 7.5 crore.

EPFO Reforms Urgent Need of the Hour 

The government needs to reform all EPFO schemes.

The EDLI scheme is not really needed and may be simply discontinued.

The EPS is a badly run, generates poor returns and is actuarially a black-hole. All EPS members can be migrated to the NPS, with their current contributions (with interest calculated at the default NPS option), transferred to their new NPS accounts.

The PFRDA should be tasked to design two new comprehensive regulated NPS schemes, one for the organised/ formal commercial sector workers and the other for informal sector self-employment workers, including gig and platform workers.

These two schemes must be made mandatory for all workers of the concerned classes, with more flexible contribution and investment options.

The currently operating pension schemes of PFRDA for the informal sector, including APY, can then be merged in these two regulated national pension schemes for organised and informal sector employees.

Finally, the EPF account can be regulated on the lines of the recently amended guidelines but with the elimination of the minimum 25 percent balance requirement.

Let the decision of how much balance should be retained in the EPF account be entirely left to employees, who can be expected to act prudentially in their own life-cycle interest.

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)