Provident Fund: Firms compromise employee interest via 'insidious' in-house trusts; time to bring in competition to EPFO

Some 1,500 companies in India, all big and most of them listed, have their own in-house provident fund (PF) trusts thus discarding the official  Employees’ Provident Fund Organisation (EPFO) other lesser employers set store by . To be sure, there is nothing illegal about these in-house or private PF trusts but it is one thing to encourage competition among PF companies so that the salaried class gets better returns on their hard-earned compulsory savings that are meant to be their post-retirement lifeboat, but quite another to encourage in-house PF trusts that insidiously take liberties with their employees’ money.

Last month, the government found nearly 300 companies running their own PF trusts flouting rules and not paying interest to their employees . There have also been cases of companies being less than punctual in depositing PF deductions from salaries as well as their own contributions to the in-house trusts smug in the knowledge that after all employees have loyalty to the management who are not going to demur.

To be sure, there are penalties for taking liberties with employees’ provident fund contributions but then prevention is any day better than cure.

In-house trusts have to offer better terms vis-à-vis the ones EPFO offers so as to make the grade both under the Provident Fund Act as well as under the Income Tax law. Thus, they allow quicker withdrawals than is possible from the EPFO, take only 0.18 percent as administrative expenses as mandated by law as against a more generous 0.50 percent allowed to EPFO besides investing a little more courageously and aggressively in mutual funds too, in addition to government securities including gilts.

EPFO, on the contrary, invests by and large in gilts with a small percentage  – 5 percent of the corpus finding its way into index funds, the most docile form of share market investments.

Employers plump for in-house trusts also for reasons of prestige— we don’t rub shoulders with the teeming millions but allow our employees to do PF business from inside the comfort of their own offices. Hotfooting to the nearest PF office is a nightmare though of late after the government started net-based PF operations for employees by signing into their UAN (universal access number), things have improved considerably.

The moot question is, why not bring in competition to EPFO rather than compromise employee interest through the potentially insidious in-house trusts. As it is the Pension Fund Regulatory and Development Authority (PFRDA) allows pension companies to compete with each other to offer pension plans. Resultantly, there are banks and private players with their own pension companies wooing employees to subscribe to their plans. Expertise in running mutual funds successfully is their trump card.

It is curious that the government is loath to extending the pension model of competition to provident fund. In the US, section 401(K) schemes are run by competing companies in addition to in-house trusts. 401(K) owes its origin to the relevant section in the US federal income tax law akin to our own section 80C.

Kenneth Lay of Enron infamy used employees pension funds parked in the in-house trusts to boost up Enron shares followed by quick unloading of his own investments in Enron shares for a fast buck (some $250 million) before Enron collapsed in the bourses. He didn’t live to serve his prison term but his estate had to disgorge the ill-gotten profits made at the expense of its employees. In-house trusts tantalise promoters into misusing employee retirement funds. They ought not to be allowed in the first place. Furthermore, unlike professional fund management companies, in-house trusts may not have the requisite expertise to invest judiciously. It is time the government gave the salaried class the option of either plumping for the sarkari EPFO or one of the numerous competing provident fund companies with the facility of portability thrown in for good measure while at the same time grandfathering the existing in-house PF trusts in a phased manner without causing disruption.

There is no earthly reason why employers should cling onto employees’ funds even for prestige reasons and as a goodwill gesture. That is not their job.

(The author is a senior columnist and tweets @smurlidharan)