The Hindu : Opinion / Editorials : EPF: A DIFFICULT DECISION

Online edition of India's National Newspaper
Friday, Aug 13, 2004

Opinion

Opinion - Editorials

EPF: A DIFFICULT DECISION

THE DECISION TO lower the yield on provident fund money lying with the Employees Provident Fund Organisation (EPFO) was bound to be contentious. At least three times in the recent past the trustees failed to arrive at a consensus and on Monday last when they decided, by a majority, to reduce the rate from 9.5 to 8.5 per cent there was predictable opposition. In matters such as this one having a significant social security dimension, economic logic, however compelling, will not be bought. At the centre of the controversy is the inability of the EPFO to persist with an arrangement that delivered a significantly higher-than-market return to its subscribers. As on March 31, 2004 the EPFO managed a corpus valued at more than Rs. 128,000 crores. Three fourths of that was invested in a Special Deposit Scheme with the Government that gives a return of 8 per cent. The Government's reluctance to pay any higher interest on the existing balances in the Special Deposit Scheme has been one of the main factors contributing to the present impasse. The other and a more general factor is the sharp decline in the market interest rates, which has meant lower returns from the investments made elsewhere. Although there has been no conscious benchmarking of EPF rates with the market interest rates, a yawning gap between the two cannot be justified indefinitely. More so because the EPFO gets a part of the returns on its investments at the current market rates. Between April 1989 and June 2000 the EPF rate was 12 per cent. Since then it has been successively lowered to 9.5 per cent.

The weight of economic logic favours the majority of the trustees who took the difficult decision. Even at the reduced 8.5 per cent rate, the EPFO is expected to run up a deficit of more than Rs. 200 crores, which it hopes to bridge through aggressive collections and recoveries. The Government with its strained finances can ill afford to subsidise a scheme that covers just 30 million out of the estimated 400 million workforce. For the rest, especially the vast numbers in the unorganised sector, where wages are lower and often uncertain, there is no scheme having a social security connotation that even remotely resembles the EPF. Clearly the Government needs to look at these vulnerable sections with a far greater resolve than ever before. Providing them with at least a modicum of social security must be a top priority.

However, those who are opposed to the reduced yield have a point or two in their favour. The task of providing a safety net to the vulnerable sections of society need not come at the expense of the organised workforce. EPF and similar schemes have never been operated on purely commercial lines. The Government has had the benefit of using vast sums of employees' money over long periods and can justify paying a premium interest on that even if the issue is addressed from the standpoint of the market mechanism. In a general sense employees do not have access to their provident funds except for certain pre-defined purposes. That is why the comparison of the administered yield on EPF with the market-determined interest on, say, bank deposits is not appropriate. Besides, recent inflation trends show that real returns from the administered schemes have come down sharply. The way out of the impasse is to move towards a sustainable market-based system presided over by an independent regulator for managing provident fund and other retirement benefit schemes. However, in the present surcharged atmosphere that would be hard to sell.

Printer friendly page
Send this article to Friends by E-Mail

Opinion

News Update

Stories in this Section

FREEDOM FROM WANT

EPF: A DIFFICULT DECISION

The `best hope' in South Asia

It is easier to deny climate change