EPF Pension Case: Supreme Court Asks Centre, EPFO To Show Materials On Cross Subsidy & Financial Burden
Posted Date: 4th August 2022
Relating to which Act: The Employees Provident Funds & Miscellaneous Provisions Act, 1952
Type: LiveLaw EPF Pension Case News Report
Pertains to employer and employee.
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Karma Global has been closely following this PF pension case for a long time where the High court had recommended that pension be allowed in proportion to the salary above the threshold limit and not upto the wage ceiling of Rs.15000/-. The EPFO has now challenged the High Court judgments in the Supreme court and the hearings are now going on.
Subject: EPF Pension Case: Supreme Court Asks Centre, EPFO To Show Materials On Cross Subsidy & Financial Burden [Day 2 Hearing Report]
EPF Pension Case: Supreme Court Asks Centre, EPFO To Show Materials On Cross Subsidy & Financial Burden [Day 2 Hearing Report]
On the second day of hearing in the EPF pension case, the Supreme Court posed queries to the Union Government and sought materials to show the financial burden which will be created on the implementation of the High Court judgments allowing pension in proportion to the salary above the threshold limit.
The bench also asked the Union and the Employees Provident Fund Organization to show materials regarding the difference between the Employees Provident Fund and the Employees Pension Scheme and also detailed reports of accounting experts relating to cross-subsidization between both the funds. The bench observed that the Centre’s financial experts must have taken into account the issue of cross-subsidization when the pension fund was introduced. The EPFO agreed to produce the reports in that regard.
A 3-judge bench comprising Justices UU Lalit, Aniruddha Bose, and Sudhanshu Dhulia was hearing the appeals filed by the Employees Provident Fund Organization challenging the High Court judgments which quashed the Employee’s Pension (Amendment) Scheme, 2014 [2014 Amendment Scheme].
“No material has been placed before us showing the problem if the Kerala High Court judgment is permitted…What is the glaring error in applying it retrospectively? Tell us that”, the bench asked Additional Solicitor General Vikramjit Banerjee, who was appearing for the Union of India.
The High Court had set aside the cap of monthly salary of Rs 15,000 for getting the pension scheme benefits and held that no cut-off date was applicable for it.
The ASG said that it has the effect of retrospectively applying the benefits of the Employee Pension Scheme which is contrary to the statutory scheme.
“The scheme says that there must be a time-to-time contribution, at very specific intervals. It cannot be at different points of time, whenever you want to contribute. That’s not the intention. That cannot be the intention. As your Lordships have seen, a number of times, it’s a definite scheme. You cannot have unlimited amounts of payouts, which we don’t even have control of…..Here, the fund is limited, it has to be definite.”, the ASG explained.
Further, he added that the Kerala High Court had struck down the entire notification, even portions that had not been challenged. The judgment also showcased a lack of application of mind and sufficient reasoning, he added.
“….the entire notification is struck down, and everything goes out including what was not challenged. There’s non-application of mind and no reasoning given in the judgment. Your Lordships have seen what the Kerala HC judgment has done, it struck down the entire notification, which means increasing Rs 6,500 to Rs 15,000, the contribution of 1.16, also gets struck down in the entire process.”
Here are the other key issues highlighted today:
Cut off Date Issue
During the hearing, Justice Lalit said that the cutoff date is one issue here and another issue would be analyzing the Kerala High Court’s take on the matter.
“…..There are certain judgments which grant them the benefit, certain judgments have refrained from granting the benefit. So, what line do we adopt here?”
The ASG said that the High Court’s judgment to make the scheme retrospective after taking away the cut-off date was totally unanticipated.
“According to us, the statute is very clear, that there must be a cutoff date”, Banerjee stated.
Difference Between Provident Fund Scheme and Pension Fund Scheme
As the hearing progressed, the Court questioned the ASG on the authority which specifies the difference in structure and treatment of EPFS and EPS.
“What is the infirmity, if at all, in the analysis made by the High Court?.. Secondly, what difference does it make? You are actually making transfers of money from one account to the other? Theoretically, tell us that the Provident Fund and Pension Fund are managed on the same principles or there are different principles?”, the Bench asked.
“Different principles”, the ASG said.
“Where do we get that a provident fund needs to be managed in a particular fashion and maximize the return on the investment to the extent possible, so that the time of retirement of the man, he will earn his original contribution and interest, whereas when it comes to pension, what kind of analysis is made? Whether the longevity of a person, their life span is taken into account?”
“I can give a comparative table on the difference”, ASG said.
“Another question now, the increase in wage structure limits the burden on provident fund scheme, it has been well absorbed by Provident Fund. Whereas it is becoming extremely difficult to absorb or sustain the Pension Scheme. Do we have that kind of comparison?”, the court queried.
Banerjee read from both the Provident Fund Scheme and Pension Scheme to explain the differences.
Further, in an attempt to satisfy the bench, Senior Advocate Aryama Sundaram appearing for EPFO submitted that,
“EPF is an individual account and with fixed interest, which is completely different from the pension fund which goes up and down……It’s (EPF) is government security because the government decides the rate of interest.”
Adding on, Sundaram said,
“With regard to pension, it is indeterminate. This means you can get back more than what you put in. Let’s say there’s premature death, a lifelong pension to the widow will come, even though you have not been putting in more. There’s much more that comes to your family. That is the indeterminate nature. Whereas for PF, you get whatever you’ve put in and interest accrued on it. In pension, there need not be a correlation between what is put in and what is taken out.”
At this point, the Bench said, “That we’ve understood”.
“With regard to pension, why planning becomes important is this: in PF fund, if a man is putting more than 15,000 or anything, there is no problem. He is getting back that amount plus interest. Let’s take the example of pension, majority of the time are the people who are contributing when they get a much higher sum…..They will continue getting pensions on that much higher sum, although they have not contributed as much. That’s where it becomes a case of subsidy. That is where the cross-subsidy comes in”, Sundaram said.
Cross subsidization
Coming to this aspect, Sundaram placed an example before the Bench.
“Now, for example, I am earning Rs 1 lakh. I put in the amount for 10 years. I have 20 years of service; I die at the end of 10 years. Pension will be given to me at that higher rate, for the entire lifetime of my wife for the next 15 years. Now, I have not put in that money. That is where cross subsidization takes place because it is one pool. It has to be taken out. Whereas Provident Fund, I take out exactly what I put in. I will be entitled to whatever I put in plus interest.”
At this juncture, the Bench said that while coming up with the Pension Scheme, the Centre’s experts must’ve known of these constraints.
“Under the first idea, you are simply acting as a bank. The second idea, you act as welfare machinery, as the government. You say that I guarantee pension to you till your lifetime and after your lifetime, to your widow, till her lifetime. Now, when you have a scheme like this, your financial management experts must be well aware of the constraints. Whether there is cross-subsidization or no cross-subsidization, the fact that because it is at an indeterminable level, somebody may die immediately after retirement within one year or within 20 years, or even prior to that. Death is not in the hands of anybody to visualize and contemplate. By very nature such a scheme, actually depends upon various combinations of chances and assumptions. The moment you have that kind of regime, your financial management people must be well aware of what is to be done”, the Bench asked.
“Till 2014, this was done. In that year, it was contemplated that cross-subsidization is going to be a problem, therefore, the Amendment came in”, Sundaram answered.
This apart, he also pointed out that this has nothing to do with retrospective because there’s no vested right is being taken away.
The Bench also asked for detailed reports on how cross-subsidization takes place.
The Bench also heard the arguments of Senior Advocate Chander Uday Singh, appearing for Tata Motors Employees Pension Fund, a trust exempted under Section 17 of the EPF Act, who opposed proportionate pension.
Yesterday, Sundaram appearing for EPFO told the Supreme Court of India the structure of the Employee Provident Fund Scheme (EPFS) and Employee Pension Scheme (EPS) is entirely different.
EPF Pension Case: A Timeline
In 2019, a three-Judge Bench comprising the then CJI Ranjan Gogoi, Justice Deepak Gupta and Justice Sanjiv Khanna had dismissed the Special Leave Petition filed against a Kerala High Court Judgment setting aside Employee’s Pension (Amendment) Scheme, 2014 that capped maximum pensionable salary to Rs.15, 000 per month.
The Kerala High Court, while setting aside the 2014 amendments by its 2018 judgment, had declared that all the employees shall be entitled to exercise the option stipulated by paragraph 26 of the EPF Scheme without being restricted in doing so by the insistence on a date.
Further, the High Court had also set aside the orders issued by the EPFO declining to grant opportunities to the employees to exercise a joint option to remit contributions to the Employees Pension Scheme on the basis of the actual salaries drawn by them.
In April 2019, the Supreme Court dismissed the special leave petition filed by the EPFO against the Kerala High Court’s judgment, through a summary order.
Later, in January 2021, a three-judge bench recalled the dismissal order in the review petitions filed by the EPFO and posted the matters for hearing in open court.
On February 25, 2021, the division bench of Justice UU Lalit and Justice KM Joseph restrained the High Court of Kerala, Delhi, and Rajasthan from initiating contempt proceedings against the Central Government and the EPFO over the non-implementation of the HC verdicts.
Case Title: EPFO vs Sunil Kumar and Ors
