Cheques and Balances — Provident funds: better safe than sorry

Let’s remember that provident funds are the only social security/retirement saving for many Indians, so the safety of their funds is as important as maximising returns. Let us now take a look at what is long term investment. Would the 34-year lifespan of UTI be considered adequately long term? In that timeframe, the Unit 64 scheme, once considered fail-safe is now in need of a bail-out from the government. There is a huge erosion in investment value of its other schemes as well. The Deepak Parekh committee report is yet to be made public and one never knows whether it ever will be.

What isclear though, is that UTI is stuck with a lot of public sector unit (PSU) equity whose market value has dropped dramatically. These are scrips which UTI was forced to buy during Dave’s tenure as chairman, because the government wanted quick funds through PSU share divestment.

The performance record of every mutual fund sponsored by a nationalised bank and institution has been as bad. Given the Indian situation, it is unlikely that investment rules will not be relaxed to allow PF investors to choose their fund managers. The hard earned savings of individuals will only be invested by government employees who are under no compulsion to perform and fear no punishment for bad decisions. In fact, one could safely bet that if provident funds were allowed to invest in equity, the board of trustees would have been arm-twisted by a desperate finance ministry to buy up PSU equity to raise Rs 5000 crore before the budget.

If a beleaguered UTI, is even today stopped from selling ITC shares to BAT at a hefty premium,why should we expect PF trustees to have more freedom? Limiting equity investment to the 50 or 100 shares of the Bombay and National stock exchange indices is all very well, but the timing of these investments is crucial. Did UTI not buy Reliance at Rs 385? It bought huge quantities of IDBI at the issue price of Rs 130, but even that turned out to be disastrously wrong — the scrip has never touched that price since. Artificial investment criteria are of no use. Only rewards accompanied by strict accountability and punishment will work, and that is unlikely to happen.

Fortunately, the trustees of the Employees Provident Fund has so far refused to invest their deposits in private sector debt. It has been argued that specifying stringent investment criteria would make investment safe. The fact is that timely divestment is probably more important than a safe investment. Best & Crompton, Nirlon, Scindia Steamship are only a few examples of major blue chips where Indian institutions and banks have lost theprincipal as well as interest, because they failed to offload their stock or were pressured into holding on to it.

Finance ministry mandarins who quote the Chilean social security reform forget to mention that trade unions were hounded and coerced into accepting the scheme. Even if one accepts that Chile has figured out a successful system of investing money, it is reasonable to assume that what works in a dictatorship will not necessarily work in a democracy, where there is less individual accountability.

The government committees and babus should also pay attention to the fact that Arthur Levitt, Chairman of the powerful Securities and Exchange Commission (SEC) has questioned the wisdom of allowing Social Security to invest in the stock market at a recent speech to the JFK School of Government. If the SEC chief is apprehensive, inspite of the wide array of investment opportunities and higher level of accountability in the US, it stands to reason that Indians need to be far more vary about investingtheir precious savings in risky investments.

A financial expert tells me that our savings are already unsafe. "You trust the existing system, but are those funds not going into equally unsafe nationalised banks and institutions and offering low returns? Can’t the government go bankrupt or put the money into its own set of unviable and hare-brained schemes which are nevertheless accepted security", he asks.

True. But until the government builds structures which force accountability on fund managers, I would prefer my investments to be at least as safe as they are today.

The Parekh committee’s recommendations and their implementation in connection with the US-64 is a good test case to check if the government is open to more accountability on the part of public sector fund managers. Until then, one can only be grateful to the Philips Employees Union and others who have filed litigation demanding the PF investment should either be safe or left to individual organisations to manage.