India Plans New Pension Scheme Under EPFO 3.0 for Formal and Unorganised Sectors

The government is working on a new pension scheme under the EPFO 3.0 framework, as per a report in the Indian Express. The pension scheme could extend retirement benefits to workers in both the formal and unorganised sectors who are currently outside the ambit of the Employees' Pension Scheme (EPS), the report claims.

What is the proposed new EPFO pension scheme?

The proposed contributory scheme will reportedly allow members to build a retirement corpus through regular contributions invested in long-term government-backed assets. At retirement, the accumulated Target Retirement Sum (TRS) could be converted into a pension through an annuity or a flexible withdrawal plan, as per the report.

How will the Target Retirement Sum (TRS) work?

The report suggests that the EPFO will allow employees to choose how to use their retirement funds at age 55. Until then, it will function similarly to PF where you continue to accumulate, claims the report. It reportedly transforms into an annuity or a systematic withdrawal plan at the time of retirement.

New pension scheme members to get a separate pension account and dashboard, says report.

Every member will have a separate pension account under the proposed pension plan, the report claims The system will calculate the recommended Target Retirement Sum (TRS) dynamically depending on the member's specified pension objective and predicted retirement age, the report says adding that The members will have personalised dashboards that show total contributions, real time corpus status, and progress toward the TRS for relevant schemes.

How will pension scheme contributions be calculated and managed?

To reach the stated TRS, the system will forecast the necessary contribution amount and frequency, claims the report.

TRS modifications will be accepted, and contribution amounts will be recalculated accordingly. The system will categorise contributions from a range of sources, including members, employers, and third parties, and will update the member's pension balance, as per the report.

How can this scheme be different from National Pension System (NPS)?

The NPS scheme is purely annuity based, the proposed pension scheme will be more flexible, risk-free and based on real rather than fictitious profits.

Quoting a source, the report says the government wants to make it comparable to the PF, which continues with just payments halted since you are retired, so you will not have any contributions.

It will then be a systematic withdrawal strategy based on your anticipated monthly pension payment. So, it may be equal to the desired interest rate, in which case the corpus would remain unchanged, the report further says. For example, if an 8% interest is declared and that 8% over Rs 1 crore is translating to Rs 8 lakh, so you divide it by 12 and that becomes your pension payout every month, the report claims quoting the source.

Could the new pension plan help tackle inflation in retirement?

Explaining the withdrawal strategy, the report claims if a subscriber wishes to withdraw a high amount first, they will have to pull down on your principal.

So, based on your lifespan, if the subscriber believes they need a good pension in 20 years, they can boost their drawdown, says the report.

At the same time, a subscriber can limit their drawdown. If they reduce their drawdown, interest will be added to their principal, the report says. So, towards the later phase, it becomes almost like an inflation-linked plan, where you might have a greater payoff, the report says quoting a source.