In whose interest?

The decision of the Central Board of Trustees of the Employee’s Provident Fund Organisation (EPFO) to increase the rate of interest for FY19 to 8.65 per cent, would no doubt be beneficial to the 4.77 crore salaried people registered with it. So far, the rate of interest had been moving steadily lower, from 8.8 per cent in FY16 to 8.55 per cent in FY18. The EPF is also offering a higher rate of return when compared with other pension products such as the Public Provident Fund. While the move will bolster the retirement kitty of its multitude of subscribers, many of whom depend exclusively on this avenue to see them through their retirement, it induces a sense of unease about the manner in which these funds are being managed. Given the current market conditions, status quo in interest rate was warranted. In a bid to provide short-term succour ahead of the polls, the Centre could be ignoring the long-term repercussions.

Currently, almost half the EPF funds are invested in securities of the Central and State governments; these are relatively safe, if held till maturity. But the rest of the funds are deployed in debt issuances of banks, financial institutions and corporates, with a small portion invested in equities through exchange traded funds. None of the sub-groups has performed well this fiscal year with the bond and equity market quite volatile and yielding negligible returns. Against this background, it is almost certain that the increase in the payout will stress the finances of the fund. The reducing surplus of the EPFO, down from ₹586 crore in FY18 to ₹151.6 crore currently, shows that the resolve to maintain high-payouts, without paying regards to the returns being generated by the investments, is eroding the reserves of the fund. Also the need to generate higher returns to manage the payouts could make the fund managers take higher risks than warranted. The first step that the EPFO needs to take to remedy the situation is to spread awareness among investors that returns cannot remain elevated forever and need to be adjusted according the returns generated by the investments held.

Next, the disclosure of the EPFO’s holdings needs to improve and the method of computing the interest payout communicated clearly. A policy needs to framed for adjusting the returns in line with the value of the underlying portfolio. There is also a need to state the investments at fair or market value, rather than at face value. Given the rising default risk in securities issued by finance companies, debt investments need closer scrutiny. Concerns over the EPFO’s investments in IL&FS’ debt are a case in point. The Centre should stop leaning on the EPFO to bail it out in its disinvestment ventures by subscribing to the Bharat exchange traded funds. Since these are retirement funds, undue portfolio risk should be avoided.

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