Di­ver­sify In­vest­ment, Don’t Blame Govt

EPF must be­have like other large pen­sion funds

The Economic Times - - The Edit Page -

Trade unions have re­port­edly op­posed the fi­nance min­istry’s di­rec­tion to lower the in­ter­est rate on the Em­ploy­ees’ Prov­i­dent Fund Scheme to 8.7% in 2015-16. The gov­ern­ment should de­sist any roll back, given that it would leave the poorly man­aged fund very lit­tle sur­plus funds, which would pave the way for a sharply lower pay­out next year, given the re­al­is­tic ex­pec­ta­tion that the yield on gov­ern­ment bonds, in which the EPF in­vests its cor­pus, would come down over the next year. The in­ter­est rate on PF bal­ances should be mar­ket-de­ter­mined, rather than be­ing an out­come of pulls and pres­sures of var­i­ous in­ter­est groups. The way in which the EPFO fi­nanced its pay­outs in the past has been opaque, bear­ing lit­tle re­la­tion to its earn­ings. Even now, the EPFO’s Board of Trustees is re­luc­tant to move with the times. That must change. The prov­i­dent fund cor­pus, about 10 lakh crore, in­clud­ing ex­empt trusts, is large enough to be in­vested across risk classes to min­imise risk and max­imise re­turns.

The bulk of EPFO’s money is held only in gov­ern­ment bonds and the rest is parked in se­cu­ri­ties is­sued by banks and public sec­tor en­ter­prises. A cut in the in­ter­est rate to let the econ­omy grow will im­pact bond yields, and lower the re­turns for sub­scribers. Eq­ui­ties, for ex­am­ple, are su­pe­rior in­vest­ments in the long term, even if they tend to be volatile. And pen­sion funds from across the globe in­vest in In­dian stocks. So, there is a case for the EPF to sharply raise in­vest­ments in eq­ui­ties.

Nor­way’s $877-bil­lion sov­er­eign-wealth fund, the world’s largest, for ex­am­ple, has huge stakes in real es­tate com­pa­nies. The larger point is for the EPFO to in­vest in di­verse in­stru­ments that com­mand a re­turn on the econ­omy’s per­for­mance. The gov­ern­ment should im­ple­ment its prom­ise in last year’s Bud­get to give work­ers the op­tion to mi­grate to the Na­tional Pen­sion Sys­tem. It should swiftly amend the EPF Act and en­able work­ers to switch to the NPS and earn su­pe­rior re­turns on their re­tire­ment sav­ings. Such com­pe­ti­tion from a ri­val fund will in­cen­tivise the Board of Trustees to choose bet­ter.

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