Finmin wants to cut EPF rates by 50 bps: Will it give way to better investments?

It is true that no one can pay an unsustainable rate of interest. This was the purported rationale for across the board 0.01 percent reduction in small savings interest rates last week. Now the Finance Ministry is proposing a meaty and hefty 0.50 percent or 50 basis points reduction in Employee Provident Fund (EPF) interest rates for 2017-18 which indeed is a drastic reduction from the one paid for 2016-17 at 8.65 percent.

Last week’s alibi was alignment of small savings interest rates with yield on government bonds. Now the alibi is alignment of the EPF interest rate with the small savings rate thus making it a riddle wrapped in mystery inside enigma. For, bond is an esoteric instrument that is not reflective of what the small savers should be rewarded with except that tangentially there is a connection---the small savings organizations invest largely in government bonds.

In both the cases, the inefficiency of the organizations is sought to be passed onto the members or participants. If EPFO is not a good investor and therefore clocks poor returns, should that be the reason for penalizing the provident fund members especially given the fact that practically employees have no choice but to become members of provident fund scheme operated by EPFO? In the USA, an employee can vote with his feet in case he is not happy with the returns offered by one of the numerous retirement benefit investment organizations.

Representative image

Representative image

Remember EPFO has been dragging its feet on investing in the bourses. Share markets give a sufficiently attractive return over a period of time. EPFO has invested but a measly one percent of its funds in the share market even though the government has cleared the decks for 5 percent investments.

The point is a virtual monopoly like EPFO has dragged the provident fund subscribers with it to inefficient and sub-optimal returns and condemned them to be content with less than optimal growth of their post-retirement corpus. In contrast, its rival and the new kid on the block New Pension Scheme (NPS) is more nimble-footed in its investment decisions and hence rewards its subscribers more handsomely.

There are two ways of improving profitability---cost reduction and income enhancement. Last December, the Central Board of Trustees (CBT) of the EPFO had recommended an interest rate for 2016-17 of 8.65 percent, the lowest in four years, for nearly 17 crore of its subscribers. As per general practice, the decision of the CBT, the governing body that manages the fund and is chaired by the Labour Minister, needs an approval from the Finance Ministry.

The Finance Ministry has been following the cost reduction approach in the process spurning and undermining the more demanding income-enhancement approach.

According to calculations presented at the December meeting of the CBT, retaining the interest rate at last year’s 8.8 percent would have resulted in a deficit for 2016-17 at Rs 383.82 crore. At a lower interest rate of 8.7 percent, there would have been a marginal surplus of Rs 69.34 crore. At 8.65 percent, the rate proposed by the CBT, the projected surplus for 2016-17 was pegged at Rs 295.91 crore. The cynical calculation is by drastically reducing the interest to 8.15 percent for 2017-18, there can be a tremendous increase in surplus for EPFO.

But can EPFO seek to boost its profitability and image by robbing employees of their dues? It should like its incipient rival, the NPS, become more efficient and nimble-footed. The Finance Ministry must change tack and emphasis on better investment than furious cost cutting. Cost cutting to be sure is desirable but not by robbing people of their dues.

Updated Date: Apr 07, 2017 07:49 AM

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