Business Standard / New Delhi Jan 31, 2012, 00:18 IST
The 48-odd million employees covered by the Employees Provident Fund Organisation (EPFO) may be touched that the finance ministry is actually considering a proposal to extend the organisation a fiscal helping hand to offer a rate of interest comparable with other savings instruments. That the stretched fisc should subsidise the relatively more affluent subscribers of the scheme is questionable politically. Yet even the EPFO’s beneficiaries, if truly concerned about the long-term stability of their savings, should be worried by such a move, if not question the basis on which one of the world’s largest provident fund institutions functions. The first concern is the eternal tussle between the EPFO’s Board of Trustees and the trade unions over the interest rate to be paid. The Board prefers to follow a path of fiscal prudence and pay interest rates on the basis of what it earns — roughly 8.25 per cent or so. The unions want the interest rate to be 9.5 per cent. The labour ministry, which oversees the fund, has opted for a via media of 8.6 per cent.
The problem with this fierce annual argument over interest rates is that it masks a deeper inefficiency of the system that no amount of budgetary support can to solve. Take the question of the EPFO’s investment strategy for its Rs 3 lakh-odd crore corpus at its disposal. It is possible that it is erring too much on the side of safety at a time when inflation is eating into savings. The Trustees have consistently declined the opportunity to invest a reasonable percentage of the corpus in equities, saying the organisation lacked the infrastructure to do so, and demanding a sovereign guarantee if it did venture into this risky territory. As a result, it continues to invest in government paper offering a modest if safe return (such as 8 per cent). Given this, it is unreasonable to expect a higher payout. But this does not account for the costs of inefficiency. Last fiscal, the EPFO discovered a surplus of Rs 1,732 crore in the interest suspense account — which was pending updation for 25 years or more — and on that basis it paid interest of 9.5 per cent for that year. Subsequent auditing revealed that the surplus was actually Rs 1,200 crore. Clearly, statements of the EPFO Board of Trustees cannot be considered watertight.
The inefficiency is much more deep-rooted than that. A little known fact is that part of its administrative costs is, in fact, by covered by contributing companies. Employers currently have to pay 1.6 per cent of the contribution (employer + employee) to the EPFO as administrative charges. In effect, this is a management charge of 6.7 per cent, which would be viewed as a scandal in the private sector. Meanwhile, the EPFO remains inefficiently administered, unable to pay retiring subscribers on time, and frequently unable to provide up-to-date details of subscriber accounts. Adding a possible government hand-out may sweeten the pill of inefficiency for a while but it does not address the EPFO’s most critical issues.
"Employers currently have to pay 1.6 per cent of the contribution (employer + employee) to the EPFO as administrative charges. In effect, this is a management charge of 6.7 per cent, which would be viewed as a scandal in the private sector."
Can you kindly explain how 1.6% got converted into 6.7% ??
This refers to the statement that (the Trustees have consistently declined the opportunity to invest a reasonable percentage of the corpus in equities, saying the organization lacked the infrastructure to do so, and demanding a sovereign guarantee if it did venture into this risky territory.) Your suggestion for investment in equities is prima facie attractive, as the EPS of blue chip companies is far higher than the coupon rate of securities. However, as investment would have to be made at the CMP (of such companies), which are prohibitively very high, the yield thereon may be far lower than the coupon rate. This problem can perhaps be solved by making preferential allotment to the EPF organization at the face value of equities. The regulatory agencies (mainly MCA and SEBI) and FICCI, ASSOCHAM, CII must play an active role in this regard. As regards portfolio management, there are efficient AMCs, with proven integrity, who would guarantee minimum return: this is not the problem.
Wrong arguments
1. Risk of equities is way too high with all the market manipulators waiting to swallow the funds! 2. Even a baby would know that Sovereign Guarantee is the worst kind of Public-private partnership with the risks being passed on to the government to clear up access to mega-funds the private sector.
3. Not getting the funds on time - This is better than somebody from the private misappropriating the funds. This can be resolved much more safely through better governance and introduction
4. Let there be a base-rate of say 9% which can be increased appropriately in high-inflation times.
The government must be happy to dip into this captive pool of savings. However, considering that it barely beats inflation, why not set up a Temasek style institution to give retiring workers greater comfort and security ? A socialist heart, a capitalist head.
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