Wednesday, Sep 17, 2014

EPFO seeks easier norms for investments amid lower returns

Written by Surabhi | New Delhi | Posted: August 26, 2014 1:23 am

Grappling with a changed economic scenario that has lowered its return on investments as well as higher inflation, the country’s largest retirement fund manager is planning for a massive overhaul of its investment norms.

Accordingly, the Employees’ Provident Fund Organisation (EPFO) has proposed easing norms for investments in corporate bonds to AA+ rated paper as well as freedom to decide its own investment pattern. The proposals are expected to be taken up at the meeting of the EPFO’s apex decision making body — the Central Board of Trustees (CBT) on Tuesday.

Pointing out that the current restrictive investment patterns means that the EPFO could only invest 5.65 per cent of its corpus in corporate bonds as against the limit of 10 per cent, it has called for expanding its investment opportunities to improve its returns.

The EPFO has sought permission from the CBT to invest in AA+ rated paper of companies with a minimum tenor of five years and maximum investment of up to 20 per cent of the firm’s networth while doing away with all other criteria.

At present, the EPFO only invests in companies with AAA rated paper. The move will enable it to invest in as many as 66 private sector companies as against the current 16.

Additionally, the retirement fund manager has also highlighted that its returns have failed to beat the retail inflation rate and has sought permission to hold fortnightly meetings of its Finance and Investment Audit Committee that would review its investment decisions.

“The main issue is that the return declared by the EPFO is below the consumer price index in four out of five years,” the agenda paper notes.

In an earlier presentation, the retirement fund agency had pointed out that the EPFO invests only in one asset class — bonds, which have a fixed rate of return. “So when inflation eases, the interest rate also reducing, meaning that the PF return can never beat the inflation rate,” the presentation had said.

Making an eventual case for investments in other asset classes such as real estate and infrastructure, the EPFO’s presentation had said it must have freedom to decide its own investment pattern suitable to its investment objectives. “We should get approvals to get the proposed asset allocation notified both from the ministry of labour and finance,” the presentation noted.

However, despite concerns over its low returns, the retirement fund manager is unlikely to agree to the new investment pattern mooted by the finance ministry that seeks to invest as much as 30 per cent of the corpus in equities, equity traded funds and mutual funds.

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