Should the Employees’ Provident Fund function as a flexible market-linked vehicle for white collar employees to build a generous retirement kitty? Or should it be a closed-end contributory fund that guarantees a minimum social security net to those at the lower rungs of the income ladder? The Employees’ Provident Fund Organisation (EPFO) seems to be quite confused on this score. Recent tweaks to its design by its Board of Trustees suggest that it is tying itself into knots, trying to meet these conflicting objectives.
Two years after it was forced to roll back its decision to restrict early withdrawals after nationwide protests, the EPFO has once again proposed changes to its withdrawal rules this week. The rules now veer in the opposite direction. EPFO members who are without employment for one month will now be allowed to withdraw 75 per cent of their accumulated balance without closing their accounts. The residual 25 per cent can be withdrawn, if they remain without work for two months. This flexibility is likely to be cheered by the more affluent members of the EPFO who are looking to take a career break to pursue higher education or start their own venture. But then, it may do serious harm to the social security of lower-income employees who make up the majority of the EPFO’s member base. Given the churn in India’s jobs market, sudden job losses are an ever-present threat for workers on the lower rungs of the income ladder. For such workers who are at the middle or fag end of their careers, the leeway to withdraw 75 per cent of the kitty to tide over short-term job losses, can mean a measly retirement corpus. A similar conflict is also brewing with respect to the EPFO’s investments. So far, the EPFO’s 15 per cent equity allocation has been invested mainly in Sensex 30 and Nifty 50 ETFs with some allocation to the CPSE and Bharat-22 ETFs. But the fund is now proposing to add stocks beyond these blue chip names in the hope of bumping up its returns. Again, higher-income earners in the PF fold may not mind taking on higher market risks for higher rewards, but the majority of EPFO members may not share this sentiment. There’s also worry that, with such relaxations, the EPFO — like the LIC — may be co-opted into rescuing beleaguered public-sector entities through equity infusions.
Given that frequent changes in its rules are befuddling its members, it would be best for the EPFO to clearly position itself as a basic social security net for India’s less-affluent workers. Higher income earners already have multiple market-linked vehicles to choose from to build their retirement kitty and must be given the leeway to opt out of EPF. Employers must be required to offer a menu of market-linked options, akin to the 401K plans in the US, to help such employees save for their retirement needs.