Fund mental problem

Provident Fund rates will be frozen until the day when permanently bountiful interest rates can be announced. So interest rates on the Employees Provident Fund for 2006-07 and 2007-08 are not known. This especially affects workers who are retiring. The basic problem of course is the 1952 EPFO Act. This says interest is to be decided by the PF board at the beginning of the year. To state the obvious, although this may not be obvious to some EPFO functionaries, the financial sector in India has changed radically since 1952, and interest rates are market determined, not administered. Setting the rate at the beginning of the year involves making a forecast of the rate, a task few finance gurus will undertake. Surely union leaders are even less likely to get this prediction right? So in the present cycle, when market interest rates are rising, the EPFO8217;s indecision means members are losing out.

Interest rate determination, or non-determination, is not the only problem. EPFO, bluntly put, is not a modern institution. At the very least, the EPFO should maintain fully computerised accounts for each member. Like a bank, it should give members monthly updates. The computerisation of EPFO has been long pending. Trade unions leaders should have vigorously supported this cause. But they count their victories and defeats in 0.5 percentage point changes of the EPFO rate.

Also, rules regarding withdrawals and transfers from one job to another need to be changed so that EPFO can actually offer its members a modicum of old age security. Currently, instead of functioning like an old age security system, it is a tax saving instrument with an interest subsidy that benefits the rich disproportionately. Better-paid employees of course have fat EPFO balances. Many put in money over and above the tax saving amount because the perception is this is a sure shot, hassle-free way to get 8216;good returns8217;. And union leaders are, of course, even if unwittingly, batting for the rich.