The management of the Rs 3.5-lakh-crore corpus of the Employees' Provident Fund Organisation (EPFO) has been the subject of debate from time to time. There are two issues that come up for periodic review: the rate of return to be provided to the 4.72 crore EPFO subscribers and the selection of a team of fund managers that can achieve this rate of return. The latter has been in the news recently. Apart from State Bank of India, which was the sole manager of EPFO funds till mid-2008, ICICI Prudential, Reliance Capital and HSBC AMC were roped in to help manage the EPFO corpus. The tenure of the three private players came to an end on June 30, and a new set of fund managers is expected to be picked by September. As many as 11 private players have expressed interest this time round. Since the management of this corpus involves the interests of millions of ordinary people, it is particularly important that the process of selecting the fund managers and their terms of operation should be transparent and above board. The tender document was sent to the Central Vigilance Commission to be vetted, and the CAG will look into how the funds have been managed in the first phase of joint management. But this is not enough. The Government should put together a set of disclosure practices.

The other related issue — fixing an annual rate of return — was the subject of a row between the Ministries of Finance and Labour the last fiscal. The Finance Ministry argued against a 9.5 per cent rate of return, questioning the funds available in the ‘interest suspense account' or operating surplus of the EPFO. However, the Labour Ministry maintained that the EPFO's operating surplus was comfortable, and the rate of return for 2010-11 was fixed at 9.5 per cent. To avoid a repeat of the situation this year, issues related to management of the suspense account should be addressed early. Crucially, the fund managers should be able to provide a consistent real rate of return with respect to consumer prices. In the current context, a rate of return below 9.5 per cent can be ruled out for this year. But how do the fund managers achieve a rate of return over time that leads to a growing operating margin? Since the Central Board of Trustees of the EPFO has ruled out investing in equities, the options are limited.

A growing economy will lead to the growth of the organised sector and, with it, the funds at the EPFO's disposal. These funds, when well-managed, can be used to extend EPFO cover to the unorganised sector. This is where the energies of policymakers should be directed — as opposed to announcing a plethora of welfare schemes that may well end up being poorly implemented. The prospects for deploying EPFO funds for the greater common good have never been as bright as now.

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