Keen to offer a higher interest rate to its six crore subscribers, the Employees’ Provident Fund Organisation wants to exit from the special deposit scheme of the government that offers an interest rate of 8.7 per cent.
To this effect, it has written to the finance ministry seeking a phased withdrawal from the scheme over a period of five years and instead invest in marketable government securities.
With returns by the EPFO being compared to that given by those offered by the National Pension Scheme, exiting the SDS could increase the interest rate on provident fund deposits by at least 0.15 per cent. EPFO had announced an interest rate of 8.75 per cent for FY14, which was 25 basis points higher than the previous fiscal but was criticised as it did not match the inflation rate.
The plan was mooted by the EPFO in January this year at a meeting of its Central Board of Trustees to help it improve its return on investments and in turn provide a higher interest rate to subscribers on their retirement savings.
Analysts point out that the yield on government securities is at least 30-40 basis points higher than that of the SDS. “It can make a huge difference given the quantum of funds involved,” said an analyst.
The return on the 10-year benchmark government security is 8.7 to 8.9 per cent while corporate bonds offer returns ranging between nine per cent and 11 per cent.
The proposal is still under discussion by the departments of economic affairs and financial services on the interest burden on the government and its impact on money market.
“It is a good option to move to marketable government securities or other investment alternatives but has to be done in such a way that it does not destabilise the market,” said the official.