Loophole in pro-rata method may impact higher PF pension calculations, experts warn

New Delhi: A loophole in the pro-rata method for calculating higher provident fund (PF) pensions has raised concerns, with critics arguing that it could lead to reduced pension amounts. The pro-rata method, which separates the service period before and after 1 September 2014, may result in lower pensions for employees whose salaries increased in the latter period.

How pro-rata method affects pension calculations

The pension formula, which calculates the pensionable salary by multiplying the pensionable service by the salary, is typically divided by 70. The pensionable salary is based on the average salary of the last 60 months before retirement. However, the pro-rata method, which treats service periods before and after 1 September 2014 separately, causes a reduction in pensions for those who experienced salary increases after that date.

For example, if an employee joins the service in 1995 and retires in 2025, their pension will be calculated differently for the two periods. For the time from 1995 to 2014, the pension will be based on the salary of August 2014, even if the average salary at retirement in 2025 is higher. This disparity results in a reduced pension for the period before 2014, which goes against the spirit of the Supreme Court’s verdict.

The issue has sparked protests, particularly against the PF circulars that mandate separate calculations for the periods before and after the implementation of the new pension scheme on 1 September 2014. MP NK Premachandran raised the matter in Parliament, urging that the pro-rata method be avoided, as it contradicts the Supreme Court’s ruling on higher pensions.

EPFO speeds up pension applications process

The Employees' Provident Fund Organisation (EPFO) has expedited the process for reviewing pension applications. According to EPFO, over 1,00,000 applications were processed last month, with 21,000 demand letters sent out. So far, 58,000 higher pension applications have been successfully processed.