The mess that146;s EPF

There is little old age security in India. The Employees Provident Fund Organisation EPFO, that provides pension and provident fund schemes covers only 4 per cent of the population. The EPFO suffers from innate difficulties. Tweaking it cannot solve them. Created in 1952, at a time when very little was understood about pension financing, many nations blindly embarked on creating 8220;some formal pension provisions8221; without understanding what they were getting into. EPFO has a peculiar governance structure, where people without knowledge of finance were the ones dominating decision making.

The provident fund scheme EPF is beset with the problem of too much interference from the government and politicians. The scheme is biased toward giving subsidies and tax concessions to the rich. The top 15 per cent of the accounts hold 85 per cent of the assets. The system is currently subsidised by the government through a higher interest rate paid on the special deposit scheme for money deposited before 2003. The pensions scheme EPS is meant for individuals with income up to Rs 6,500 a month. These individuals cannot afford to take risks, yet the scheme is inherently risky. It was created in 8217;95 and has been described as 8220;Manmohan Singh8217;s biggest blunder8221;.

Today, the EPFO mixes up three functions: it is policy maker, regulator and service provider. This is a recipe for trouble. UTI was a famous example of a government body in the area of finance, which went around making promises and ended up in hot water. LIC used to be in a similar situation, of service provision in finance without a regulator, but that situation has been clarified by the creation of IRDA as a regulator. The EPFO, LIC and UTI, all suffered from the problem that they were created by an act, and were not normal companies. This has prevented it from benefitting from the flexibility provided by modernising policies. What is the way out? There is a need for a three-way separation between policy formulation, regulation and service provision. Competing private sector finance companies will excel at service provisions. The subsidies should be removed. Policy making and governance of EPFO should be put into the hands of financial experts. The EPFO should come under the regulation of the new pension fund regulator, the PFRDA, exactly as UTI was brought under the regulation of the new SEBI. It will be fitting if Manmohan Singh, who gave us the problem of EPS in 1995, provides us with the solution in 2005.