The government is drawing up plans for a new contributory pension scheme that would extend retirement security to workers in both the unorganised and formal sectors, a senior government official said. Contributions under the scheme would build up over time, staying invested in long-term, government-backed securities and earning interest credited annually.
Once a member turns 60, the scheme will convert their accumulated savings, referred to as the “Target Retirement Sum” (TRS), into a pension, calculated using the annuity and interest rates prevailing at the time. The initiative forms part of the next phase of reforms at the Employees’ Provident Fund Organisation (EPFO), designed to bring in workers currently left out of the Employees’ Pension Scheme (EPS).
According to an Indian Express report, the official said the government is studying retirement fund models from countries such as Singapore to shape the new scheme, which will roll out under the EPFO 3.0 reform programme. This phase will also introduce new technology features and move the retirement body onto a core banking solution.
“Under the proposed scheme, at the age of 55 years, a worker can decide the purpose for retirement savings. Till that time, it will operate like PF; you keep on accumulating. At that stage, when you are retiring, it converts into an annuity or a systematic withdrawal plan,” the official explained.
How Scheme Would Work
Each member would get an individual pension account on EPFO’s digital platform, with contributions accumulating over time in long-term, government-backed securities and other approved instruments, earning annual interest. Another official added, “At the age of 60, the proposed Target Retirement Sum (TRS) would be converted into a pension, based on annuity and interest rates. The system will compute the TRS dynamically based on the member’s chosen pension goal and expected retirement age. Members will have personalised dashboards showing total contributions, real-time corpus status, and progress towards the TRS for applicable schemes.”
The system would also calculate how much a member needs to contribute, and how often, to hit their declared savings target. Members could revise their target along the way, with contribution requirements recalculated accordingly. “The system will accept and categorise contributions from multiple sources such as members, employers, or third parties and update the member’s pension balance,” the official said.
Not Quite NPS
Asked whether the scheme would resemble the National Pension System (NPS), one official drew a clear distinction: the NPS runs purely on an annuity basis, whereas this new scheme would offer more flexibility, carry less risk, and be based on actual returns rather than notional ones.
“We want to make it similar to the PF, which continues with only the contributions being stopped because you are retired, so you will not have any contributions. It will then be a systematic withdrawal plan based on your expected monthly pension payout,” the official said, illustrating with an example, “So, it can be equal to the interest that you want, in which case, the corpus will remain the same. For example, if 8% interest is declared and that 8% over Rs 1 crore is translating to Rs 8 lakh, you divide it by 12, and that becomes your pension payout every month.”
Members could also opt for a higher payout early on by drawing down from their principal. “If you want higher in the initial stage, then it will be a drawdown from your principal. So, based on your longevity, you estimate that in 20 years, you want to have a good pension; you can increase your drawdown.
At the same time, you can reduce your drawdown. If you reduce your drawdown, your interest will get added to your principal. So, towards the later part, it becomes almost like an inflation-linked plan where towards the later part, you can have a higher payout. This is what we are thinking about,” the official said.
Planning Tools For Members
The EPFO 3.0 system would let members simulate their expected pension using inputs such as age, corpus size, interest rate and retirement age, alongside fields for voluntary top-ups and contribution frequency. Inflation-adjusted projections would be available as an optional feature, with the platform displaying estimated monthly pension, projected retirement corpus, and comparative graphs to help members weigh different scenarios, including variable contributions and multiple jobs over their working life.
The scheme would also build in family and survivor pensions for spouses, children, and orphans, funded through a pooled “Family Benefit Fund” run on actuarial principles. Members of EPF, GPF, and other provident funds may also be given the option to transfer their existing balances into the new scheme to boost their retirement savings.
Widening Safety Net
This next phase of EPFO reforms is also expected to extend provident fund coverage to gig workers and those in the unorganised sector, moving towards universal social security for both formal and informal workers, in keeping with the Code on Social Security. While the scheme will lean on EPFO’s digital infrastructure, the Ministry of Labour and Employment has yet to decide which agency will oversee its implementation.
Built on a defined contribution model, the scheme would draw funding from several sources — workers themselves, employers, government co-contributions for lower-wage workers, aggregators for gig and platform workers, and CSR or third-party funds.
The Code on Social Security, 2020, already brings gig and platform workers under the social security net, requiring aggregators to contribute 1-2% of their annual turnover, capped at 5% of the total amount payable to workers. “The new pension initiative would operationalise this through flexible co-contribution models, ensuring that delivery partners, drivers, and other platform workers are systematically included,” the official said.
The Scale Of Challenge
Of India’s 55 crore-strong workforce, nearly 41.8 crore workers, about 76 per cent, belong to the unorganised sector, with little or no pension cover at present. The scheme also aims to bring building and construction workers into the fold. “India has over 3.5 crore registered BOCW workers, with net cess collections exceeding Rs 70,000 crore across state welfare boards. The new scheme will provide a structured avenue to channel these resources into sustainable pensions, ensuring adequacy and portability of benefits,” the official said.
Even workers earning above the wage ceiling, who currently fall outside EPS coverage, stand to benefit. “The new pension scheme would also allow them to build retirement savings in a contributory, actuarially sound framework under EPFO,” the official added.
Filling Gaps Left By EPS
The proposed scheme is designed to reach segments currently excluded from the EPS, a defined benefit scheme that, since 2014, has been limited to workers earning below Rs 15,000 a month. For those who joined the workforce before 2014, the entire employee contribution goes into the EPF, while the employer’s 12 per cent contribution is split between EPF (3.67 per cent) and EPS (8.33 per cent).
The government adds a further 1.16 per cent towards the pension of employees below the wage threshold, though employees themselves do not contribute to the pension component. Under current rules, workers become eligible for pension benefits only after completing ten years of contributory service and reaching the age of 58.
