The Hindu Business Line : Fund of problems

The decision of the Central Board of Trustees of the Employees' Provident Fund to defer the decision on the interest rate payable on accumulations during the current fiscal is shocking. The interest rate ought to have been fixed at the beginning of the fiscal, if not earlier, so that there is no delay in the settlement of accounts of retiring employees. After a long productive life, they undergo considerable anguish on retirement. The sense of self-esteem, which until then was driven largely by the status of a wage-earner, takes a harsh knock on their reaching the age of retirement. That there is also a significant dip in the household income does not help matters. In the event, a delayed settlement of final dues not only does nothing to alleviate the mental agony but only serves to heighten the despair imposed by the financial stringency. The administrative bickering over the issue is symptomatic of a larger malaise of declining standards of governance in the country.

The stalemate is an unfortunate outcome of lack of proper understanding of the underlying issues. The Government nominees have objected to the PF Trust crediting a rate of interest higher than what the Trust has earned on its investments. It can be nobody's case that the Government should subsidise investor expectations beyond what the Fund itself is capable of supporting on the strength of its own investment performance. But when the Government impounds by law a substantial portion of the annual accretions to the corpus of the Trust in a special deposit scheme maintained by it, then the issue gets complicated. For then the investment performance of the Fund is a function of the interest rate credited on deposits placed with the Government. Clearly, the latter owes to the contributing members a rate of interest that is marginally higher than the weighted average rate of interest on dated government securities, given the extra long tenor of these savings and also the fact that the Government did not do enough to create a market in such securities. Indeed it did not even have such instruments until very recently.

Viewed from that perspective, the employees' case for a crediting a higher rate of interest on such deposit is not without merit. As of March 2006 the weighted average rate of interest on dated government borrowings stood at 8.58 per cent. In the current fiscal, interest rates have only hardened warranting a hike in the deposit rate. In the long run, the Government would be doing itself a service by proactively disengaging from the asset management function vis-à-vis public savings and gradually liberalising the norms of special deposits with it before abolishing it.

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