Improvident Fund

The Manmohan Singh government, presumably under pressure from the Left parties, has announced an Employees Provident Fund (EPF) rate higher than what the EPF earned in 2004-05. Under the EPF scheme Para 60(4), the interest liability of EPF cannot exceed the income earned by the EPF from its investments during that year. To give a rate higher than what was earned is the path to another US-64 type situation. Yet, the government has declared an interest rate of 9.5 per cent which will create a deficit of Rs 927 crore. Who will pay for the deficit, and indeed how will it be paid? When the EPF statues do not permit a clear subsidy to be paid, how will the EPF get higher returns when the interest rate on SDS, in which 80 per cent of EPF funds are parked, has not been changed.

At the root of the problem lies the way the interest rate on the EPF is determined. The Central Board of Trustees of the Employees Provident Fund Organisation, which has trade unions as members, in discussions with the government, decides the interest rate and the finance ministry ratifies it. Instead, the scheme should operate on the proper accounting principals on which fund managers and mutual funds operate. To use incoming contributions to pay high interest rates which are not sustainable can lead to bigger and bigger holes. Rates should not be “declared” before the beginning of a year. Whatever is earned should be paid out as interest.

As this newspaper has pointed out in the past, the bulk of the interest subsidy goes to the top 15 per cent of the members, who in no way qualify for such a subsidy. It is ironic that the trade unions put pressure to give them more money. There is a need to limit the membership of the EPFO to mandatory members, who earn below Rs 6,500 a month so that even if the government chooses to give a subsidy, only they are the beneficiaries. Recently, the scheme to computerise the EPFO was abandoned. It is time for the organisation to be recreated along modern accounting and functioning principles. The high level of defaults, the poor service, the lack of proper tracking of the individual accounts of the estimated four crore members and the political interference, which will inevitably make the scheme unsustainable, will put the old age security of its members at peril. It is time for the complete reinvention of the EPFO.