The math behind EPF146;s 8.5 rate

However, those details raise some questions about the deficit funding.

According to the Labour Ministry, Rs 27 crore would be drawn from additional recovery of damages. Another Rs 133.52 crore would be drawn from Contingency Reserve and the balance Rs 205.37 crore is to be culled from the Special Reserve Fund. All these, added together, will meet the Rs 365.89 crore deficit.

Though it8217;s illegal for the EPFO to pay its members more than it earns, to begin with, here8217;s why the numbers don8217;t add up. For one, the Contingency Reserve of Rs 133.52 crore has been created by deducting 2 per cent from this year8217;s income itself.

There is no provision in the EPF Act, 1952, for creating such a reserve from income. Under the Act, all the income earned has to be apportioned to members through the Interest Rate Suspense Account.

In any case, reserves are normally created when an organization has a surplus. So the Contingency Reserve8217;s creation this year is odd. A senior EPFO official, however, says that every year they put aside some money from income to protect themselves against 8216;bad loans or contingencies.8217;

Since there have been no contingencies in the financial year so far, the funds can be used to pay the higher interest, they explain.

More interesting, however, is the use of the Special Reserve Fund SRF. The SRF is not meant for funding shortfalls, but for paying off retiring employees whose employers had defaulted on PF contributions. Last year, too, the government had dipped into the SRF to fund the Rs 716-crore gap between EPFO8217;s income and the money needed to pay a 9.5 per cent PF rate.

Even if you ignore the un-mandated use of SRF in such situations, there8217;s an arithmetical problem. Last year, the SRF had a balance of Rs 860 crore, of which Rs 716 crore was used to pay 9.5 per cent. That left the SRF with a balance of Rs 144 crore.

From this year8217;s income, Rs 19.33 crore has been credited to the SRF as interest, taking its balance to Rs 163.33 crore. No fresh funds can flow into the SRF since 1989-1990. The official says that last year8217;s 9.5 per cent interest rate was subsequently credited on last year8217;s SRF balance of Rs 860 crore and, therefore, the SRF now has enough to pay the Rs 205-odd crore.

It8217;s not clear how much now remains in the SRF 8212; two officials cited different figures of Rs 10 crore and Rs 50 crore. Ironically, the SRF was a forfeiture account, whose funds are to be used specifically to pay workers who realize at retirement, that their employers never actually contributed the PF contributions deducted from their salary.

Last, but not the least, it8217;s unclear if the government has sought the permission of the Comptroller Auditor General of India, that lays down the accounting norms for government undertakings, before engaging in this numerical jugglery.