In a recent ruling of the Hon’ble Supreme Court of India (“SC”) in the matter of Employees’ Provident Fund Organisation & Another v. Sunil Kumar B. and Others, the SC examined the legality of certain amendments made to the pension scheme by the Central Government in 2014, while hearing appeals from different judgments of High Courts of Kerala, Rajasthan and Delhi, which quashed most of the said amendments.

We have provided below a brief background of the amendment and the relevant issues involved, while subsequently discussing the impact of the judgment.

Background:

In terms of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”) and the Employees’ Pension Scheme, 1995 (“EPS Scheme”), out of the 12% contribution made by employers under the EPF Act, an amount of 8.33% is diverted to the pension fund. This corpus is used to provide the member a monthly pension upon retirement, which is based on the pensionable salary & pensionable service and is calculated as per the EPS Scheme.

Vide its notification dated August 22, 2014, the Ministry of Labour & Employment, Central Government carried out certain amendments to Paragraphs 3, 6, 11, 12 and 14 the EPS Scheme, w.e.f. September 1, 2014 (“Amendment”) which mainly included the following:

1. Computation of Pensionable Salary – The Amendment sought to compute pensionable salary based on the average monthly pay drawn during a contributory period of service in the span of 60 (sixty) months preceding the date of a member’s exit from the pension fund, as opposed to average monthly drawn during a contributory period of service in the span of 12 (twelve) months preceding the date of exit, as it stood prior to the Amendment.
2. Maximum Pensionable Salary (“MPS”) & Option to contribute over MPS – The MPS was increased to Rs. 15000/- per month, from the earlier ceiling of Rs. 6500/- per month. However, existing members as on 1 September 2014, who, at the option of the employer and employee, had been contributing on a monthly salary exceeding Rs. 6500/- per month could exercise a fresh option jointly with the employer to contribute on monthly salary beyond Rs. 15000/- and the pension for such members would be computed accordingly on such higher salary (“2014 Option”). The 2014 Option was required to be exercised by the members within a period of six months from September 1, 2014, which was further extendable up to 6 months on sufficient cause shown by the member. Failing exercise of the 2014 Option within such period, the Amendment provided that it would be assumed that the member has not opted for contribution over the MPS.

A similar option was allowed to be exercised by way of amendments in Para 11(3) of the EPS Scheme made in the year 1996, whereby the employee and the employer could jointly agree to contribute over the then prevalent MPS of Rs. 5000/-, which was subsequently increased to Rs. 6500/- in 2001 (“1996 Option”).

3. Additional Contribution by Employees drawing Salary exceeding Rs. 15000 – Employees contributing on monthly salary more than Rs. 15000/- per month were required to additionally contribute at the rate of 1.16 per cent on monthly salary exceeding Rs. 15000/- (“Additional Contribution”).

Judgment:

The SC, while hearing arguments of the parties vis-à-vis the validity of the aforesaid aspects of the Amendment, held as follows:

1. The SC held that the Amendments were legal and valid, while reading down certain provisions of the Amendment in so far as the present members of the EPS Scheme were concerned
2. The SC agreed with the reasoning given by its division bench in the matter R.C. Gupta & Others v. Regional Provident Fund Commissioner, Employees Provident Fund Organisation & Others and reiterated that the benefit under a beneficial scheme such as EPS Scheme cannot be curtailed by imposing a cut-off date, especially when the pre-amendment EPS Scheme did not contain any such cut-off date. Therefore, the cut-off period imposed under the Amendment for exercise of the 2014 Option was held to be invalid. Consequently, the SC clarified that:a)  Employees who had exercised the 1996 Option and continued to be in service on September 1, 2014, would automatically be entitled to the benefit of the 2014 Option.
   b) Employees who had not exercised / been allowed by the EPFO to exercise the 1996 Option, would be entitled to now exercise a joint option covering the 1996 Option as well as the 2014 Option. Exercising its jurisdiction under Article 142 of the Constitution of India, the SC allowed such option to be exercised within a period of 4 (four) months from the judgment.
3. The Imposition of Additional Contribution under the Amendment was illegal inasmuch as there was no such contemplation under the EPF Act. However, the SC suspended the operation of this part of the judgment for 6 (six) months so that the legislature could consider the necessity of bringing appropriate legislative amendment to generate such contribution from some other legitimate source within the scope of the EPF Act.
4. The SC found no flaw with alteration of the methodology used for determination of pensionable salary and held that it was within the powers of the Central Government to do so, and was neither illegal nor unconstitutional.
5. The Amendments were clarified to apply to employees of exempted establishments in the same manner as employees of regular establishments. Hence, for employees exercising / who are entitled to the benefit of the 1996 Option and the 2014 Option (as above), the SC directed transfer of funds by exempted establishments between provident fund and pension accounts in the manner directed in the judgment.

Accordingly, the Amendment has now been held to be valid with the aforesaid changes, and the Central Government may be expected to make modifications to the EPS Scheme to implement the aforesaid observations given by SC in the judgment.