Streamline EPF credits

The Employees’ Provident Fund Organisation (EPFO) has been the primary retirement vehicle for India’s organised workers for many decades. Annual interest credit on the scheme should by now a routine affair. But in the last couple of years, EPF subscribers have been subjected to unnecessary suspense and delays both on the quantum and the timing of these credits. Interest payouts for FY20 have been put off till date with promises of subscribers getting them by end of December. In FY19, the interest due was credited only in September, a good six months after the close of the financial year. Such delays entail significant losses to subscribers as they lose out on many months’ worth of compounding benefits on their accumulated corpus. Settlements to workers who have withdrawn or exited after the end of a financial year too are distorted by such delays.

While protocols for EPF’s interest declaration are well-established (its Board of Trustees recommends a rate, which is ratified by the Finance Ministry and then notified by the Labour Ministry), lately the Finance Ministry has been raising questions about the adequacy of surpluses to fund the payouts recommended by the trustees. One cannot wholly blame the Ministry for its caution, given the scheme’s unusual accounting practices. The annual ‘interest’ declared by the scheme is in reality a dividend resulting from the surplus left with the fund, after deducting its running expenses from its investment income and fees collected from member institutions. But the estimation of this surplus is a grey area too. Thanks to persistent delays in finalising EPF accounts, the trustees often recommend interest based on a ballpark estimate of the surplus. The CAG has on more than one occasion flagged the widening gap between the EPF’s investment returns and the interest it pays, which sometimes leaves behind a deficit. Lately estimation problems have been compounded by lack of mark-to-market accounting on the EPF portfolio. In 2019, interest credits were held up as the fund grappled with a suitable method to account for losses from its IL&FS bond exposures. In 2020, stock market swings between March and now have led to varying estimates of surplus. The EPF now deploys 15 per cent of incremental flows each year in equities.

The Centre needs to push for a method to account for market-linked losses, so that the returns credited are a fair reflection of the portfolio performance. Dipping into capital to pay artificial ‘interest’ can dent the retirement accumulations of the very workers they’re trying to protect.