Diversify Investment, Don’t Blame Govt
EPF must behave like other large pension funds
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.