EPFO’s Proposed Universal Pension Scheme – Explained

Universal Pension Scheme Latest News

• The Union Government is working on a new EPFO-led contributory pension scheme under the EPFO 3.0 reforms, aimed at providing a flexible, universal retirement savings framework for formal, informal, and gig workers.

Background

• India’s social security landscape is fragmented, with different retirement schemes catering to different sections of the workforce. 
• While organised sector employees are covered under the Employees’ Provident Fund Organisation (EPFO) and the Employees’ Pension Scheme (EPS), a large proportion of informal workers, gig workers, and higher-income employees remain outside comprehensive pension coverage.
• According to the Periodic Labour Force Survey (PLFS), nearly 90% of India’s workforce is employed in the informal sector, many of whom lack adequate retirement security. 
• The implementation of the Code on Social Security, 2020, further highlighted the need to extend social security benefits to gig and platform workers for the first time.
• Against this backdrop, the government has initiated EPFO 3.0 reforms, which aim to modernise the retirement system through digital infrastructure, greater flexibility, and universal coverage. 
• As part of these reforms, the Ministry of Labour and Employment is developing a new contributory pension scheme centred around the concept of a Target Retirement Sum (TRS).
• Unlike the existing Employees’ Pension Scheme (EPS), which follows a defined-benefit model subject to eligibility conditions, the proposed scheme is expected to adopt a defined contribution framework, allowing individuals to build a retirement corpus through contributions from multiple sources while offering greater flexibility in retirement planning.

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Proposed Target Retirement Sum (TRS) Scheme

• The proposed scheme is a defined contribution pension system under which every subscriber will maintain an individual pension account.
• Instead of guaranteeing a fixed pension amount, the scheme will help members accumulate a Target Retirement Sum (TRS) based on:
  • Desired retirement income
  • Expected retirement age
  • Periodic contributions
  • Investment returns
• At the age of 60 years, the accumulated corpus may either:
  • Converted into an annuity based on prevailing annuity and interest rates; or 
  • Withdrawn through a Systematic Withdrawal Plan (SWP), depending on the member’s preference. 
• The scheme seeks to combine the long-term savings approach of the Employees’ Provident Fund (EPF) with the pension objective of retirement planning.

Key Features of the Proposed Pension Scheme

• Defined Contribution Framework
  • The proposed scheme will follow a defined contribution model, under which pension benefits will depend on the accumulated corpus rather than a pre-defined pension amount.
  • Contributions will be invested in long-term government-backed securities, with interest credited annually to the pension account.
• Target Retirement Sum (TRS)
  • Each subscriber will be able to choose a Target Retirement Sum, representing the desired retirement corpus.
  • The EPFO’s digital platform will:
    • Dynamically calculate the required corpus
    • Estimate the contribution amount needed
    • Track progress towards the target
    • Allow members to revise their retirement goals over time
  • Members will have access to personalised dashboards displaying:
    • Total contributions
    • Current corpus
    • Progress towards the TRS
    • Projected retirement benefits
• Multiple Sources of Contributions
  • One of the distinguishing features of the scheme is its flexible contribution model.
  • Contributions may come from: 
    • Employees & Employers
    • Government co-contributions for lower-income workers
    • Aggregators for gig and platform workers
    • Corporate Social Responsibility (CSR) funds
    • NGOs and other third-party contributors
  • This multi-source approach aims to improve retirement savings, especially for workers with irregular incomes.
• Flexible Pension Withdrawal
  • Unlike traditional pension systems that mandate annuity purchase, the proposed scheme will provide flexibility in retirement withdrawals.
  • Members may choose:
    • A regular annuity
    • A Systematic Withdrawal Plan (SWP)
    • Higher withdrawals during the initial years of retirement
    • Lower withdrawals to allow the remaining corpus to continue earning interest
  • This flexibility is intended to help retirees align pension pay-outs with their financial needs.
• Inflation-Adjusted Retirement Planning
  • The proposed digital platform will include pension simulation tools based on factors such as:
    • Age
    • Retirement age
    • Corpus size
    • Interest rates
    • Voluntary contributions
    • Contribution frequency 
  • Members will also receive inflation-adjusted projections, enabling better long-term retirement planning.
• Coverage of Gig and Informal Workers
  • A major objective of the scheme is to expand social security coverage beyond the organised workforce.
  • The proposed framework will cover:
    • Gig workers
    • Platform workers
    • Building and construction workers
    • Informal sector workers
    • Existing EPFO subscribers
    • Employees currently outside the Employees’ Pension Scheme (EPS)
  • The government expects nearly 2.5 crore gig workers and construction workers to be brought under the social security net over the next five years.
  • To facilitate multiple employments, the scheme will introduce a one-to-many mapping, allowing a single Universal Account Number (UAN) to be linked with multiple employers and digital platforms while maintaining separate contribution records.
• Family and Survivor Benefits
  • The proposal also includes a Family Benefit Fund, managed on actuarial principles.
  • The fund is expected to provide:
    • Survivor pension for spouses
    • Benefits for children
    • Support for orphaned dependents
  • This would strengthen the social protection aspect of the pension system.

Significance of the Proposal

• If implemented, the proposed pension scheme could significantly strengthen India’s social security architecture by:
  • Expanding pension coverage to millions of informal and gig workers
  • Providing greater flexibility in retirement planning
  • Encouraging voluntary retirement savings
  • Leveraging EPFO’s digital infrastructure for efficient service delivery
  • Supporting the implementation of the Code on Social Security, 2020
  • Reducing old-age income insecurity among workers outside the organised sector
• The proposal also aligns with the government’s broader objective of achieving universal social security coverage.

Source: IE