The Central Board of Trustees (CBT) has paved the way for EPF to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) launched by public sector undertakings. REITs and InvITs are regulated vehicles which own a basket of completed cash-generating commercial properties or infrastructure assets. As they are required to distribute over 90 per cent of their income, they offer regular cash flows along with the prospect of capital appreciation from holding a portfolio of hard assets, making them a good alternative asset class for the EPF.
With its ₹24 lakh crore corpus, the EPF’s foray into this space could also have the welcome effect of creating additional demand for REIT and InvIT public offers and improving their secondary market liquidity. The requirement that the EPF only invest in PSU-sponsored REITs and InvITs, is probably intended to aid the Centre’s plans to monetise PSU assets. But in the interests of subscribers, the EPF should also be allowed to invest in REITs/InvITs sponsored by private sector entities that have built up a track record of healthy distributions.
The CBT approving a redemption policy for EPF’s holdings of equity Exchange Traded Funds (ETFs) such as CPSE ETF and Bharat 22 ETF, was much needed. The minimum five-year holding period specified now will allow these equity investments some time to mature and generate returns. Allowing the EPF to redeem ETF units also solves the problem of realising cash flows from these funds for distribution to subscribers. ETFs generate returns entirely through capital appreciation and do not pay out dividends, while EPF seeks regular income from all its investments. Reconciling the two has been a vexing issue for the fund ever since it began investing in ETFs in 2015. One hopes that the new redemption policy for ETF investments will go hand-in-hand with mark-to-market accounting of these investments and regular benchmarking of their performance with the market.
More than all this though, EPF subscribers may welcome the news that the EPF is taking concrete steps to address the rather high incidence of claims rejections. While automatic approvals for advances of upto ₹1 lakh may help subscribers access their monies for emergencies, it is the rejection of claims from employees applying for final settlement that is the real worry for subscribers. The EPF’s FY23 annual report (its latest in the public domain) showed over 30 per cent of final claims being rejected that year.
The EPF has now submitted that the rejection rate has been brought down to 14 per cent recently. But even these numbers are rather too high for comfort, given that most employees rely on the EPF as their primary retirement vehicle. The EPF’s IT infrastructure needs to be updated on a war footing to weed out duplication and allow easy online correction of subscriber records, which seem to be the main reasons for high rejection rates.