Prudence for future

Prudence for future

EPFO needs linkage with market determined rates. That would be in long-term interest of its growing number of subscribers.

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Now that the polls are in the last phase, it is time for a reality check and for some tough decisions.

A month before the announcement of national polls this year, the Employees Provident Fund Organisation (EPFO) announced an interest rate of 8.65 per cent for millions of its subscribers for 2018-19, which is 15 basis points higher than what it paid in the previous fiscal. Now that the polls are in the last phase, it is time for a reality check and for some tough decisions. The finance ministry, which has to ratify the interest rate proposed by one of the world’s top social security providers, has flagged its concerns on the higher pay-out this time in the context of the potential risks to some of the EPFO’s investments in troubled firms such as IL&FS. The ministry’s worry stems from the fact that the organisation may have to dip into its surplus if some of the investments turn sour and the prospect of demands being made on the government to underwrite such losses. That may be a little overblown considering that its investments in IL&FS amount to Rs 574.73 crore, a tiny slice in an investment portfolio now over Rs 10 lakh crore.

Yet, an interest rate of 8.65 per cent for its subscribers — exempt from tax at all three stages — contributions, earnings and withdrawal, is over one per cent higher than the risk free ten-year government bond and much more attractive than other schemes such as small savings and PPF. The EPFO would be left with a residual surplus of only Rs 151.67 crore after the high payout in 2018-19. Clearly, this rate is out of sync with the markets and is unsustainable. Recognising the need to move away from administered rates and to prevent distortions, the government has benchmarked returns on small savings schemes to the yields on government bonds. The EPFO, too, now needs to have a linkage with market determined rates. Over the past few years, the organisation has transformed, reflected in the huge expansion in coverage with formalisation of the workforce, better compliance and governance, besides faster resolution of claims and the use of technology.

In the same spirit of change, and in the long-term interest of its growing number of subscribers, the EPFO should adopt a more prudent fiscal course. The asset to GDP ratio of pension and retirement funds in many countries in the West is well above 100 per cent but it is in the low single digits in India. The government has much at stake in ensuring sound governance in the EPFO, not just because of its social security obligations but also given its potential to fund long-term infrastructure projects and to emerge as a stabilising influence in India’s financial markets.