Express View on EPFO: Topic of interest

Over the years, there has been a growing mismatch between the surplus/deficit projected by the Employees Provident Fund Organisation (EPFO) when it announces the yearly interest rate and the actual deficit/surplus. During years of bigger surpluses, this may not cause financial issues.

For instance, in 2019-20, when the EPFO had announced an interest rate of 8.5 per cent, the actual surplus was Rs 954.62 crore, higher than the initial projection of Rs 700 crore. However, there is a cause for concern when there is an actual deficit as against the organisation’s projection of a surplus.

For example, in 2021-22, against the projection of a Rs 450 crore surplus, there was actually a deficit of Rs 197.72 crore.

In July, the finance ministry had flagged this issue of the EPFO slipping into a deficit. And now, as reported in this paper, the Central Board of Trustees of the EPFO have been instructed not to declare the interest rate beginning from the ongoing financial year without the consent of the finance ministry, and to also examine the high interest rates announced by the organisation.

In the past, too, there has often been criticism of the EPFO announcing a higher interest rate that is not considered to be in line with the prevailing market scenario.

For instance, for 2020-21, it had recommended an interest rate of 8.5 per cent, when in comparison, the 10-year GSec yields had fallen to 6.23 per cent, and the SBI was offering 5.4 per cent on 5-10 year deposits. As a sizeable share of the funds with the organisation are allocated towards government/debt securities, paying its contributing members a higher rate — the 10-year GSec yield is currently hovering around 7.1 per cent — would entail investing in higher interest yielding bonds or increasing the allocation towards equities.

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This shift in portfolio allocation would involve a change in the risk-reward profile of investments, and thus requires serious consideration. The EPFO’s past investments in higher yielding securities of companies such as IL&FS, Dewan Housing Finance Corporation and Reliance Capital only highlight the risk this poses, and the need for carefully accessing such options.

Considering that the employees’ provident fund forms an integral part of the social security framework in the country, it must adopt a cautious approach, even though its contributing members will be desirous of higher rates, and understandably so. It must carefully assess the risk-reward matrix of its investment portfolio, taking care to minimise the risks as it pursues greater returns, while also aligning the interest rate with the broader market realities.

Alongside, the EPFO must not only be more careful in its assessment of its obligations, it should also be more transparent about its operations by releasing regular updates of its portfolio and investment decisions.

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