Employees Provident Fund Organisation (EPFO) to get street smart-Finance Ministry

Finmin asks EPFO to get Street-smart

NEW DELHI: The finance ministry has set the stage for a showdown over the ultra-conservative investment strategy of the Employees Provident Fund Organisation, a body which oversees the management of about 5 lakh crore in savings, a sum equivalent to the annual economic output of India’s largest state Uttar Pradesh. The ministry is asserting its supremacy in prescribing the investment rules for provident fund money, a sign that it has lost patience with an EPFO that is reluctant to adopt a more liberal investment pattern.

In a letter last month to labour secretary Prabhat Chaturvedi, the top bureaucrat in the finance ministry insisted that it is “imperative” that the EPFO adopt the investment pattern determined by finance ministry. Ashok Chawla even suggested that the labour ministry should use its powers to circumvent the board of trustees of EPFO, a provider of retirement income for nearly 5 crore employees, if change is not forthcoming.

EPFO manages some 3 lakh crore of its own and also has under its watch an additional nearly 2 lakh crore from thousands of privately-run provident fund trusts. It has an all-debt portfolio and bulk of the money is invested in government securities or public sector bonds. It guaranteed a payout of 8.5% in 2009-10 .

Mr Chawla contrasted the lethargic performance of the Employees Provident Fund, which returned 8.5% in the last two fiscal years, with the nearly 15% return in 2008-09 for central government employees under the New Pension System. “In the interest of employees’ welfare, a small beginning could be made by investing a small part of the incremental accretions in stock markets based on the risk-return appetite of the trustees,” he wrote.

Mr Chawla has said that a liberal investment pattern should apply to money managed by EPFO as well as funds in privately-run provident fund trusts overseen by it. Under finance ministry rules unveiled in 2008, the EPFO can invest up to 15% of fresh accretions in the stock market, but this is not mandatory.

THE BACKGROUND

In 2005, finmin allowed PFs to invest 5% of fresh accretions into equities. It was raised to 15% in 2008, but it was made optional Labour ministry-run EPFO rejected the 2005 investment pattern. EPFO board of trustees has been debating the 2008 pattern, but there’s no decision in sight ‘Excluded PFs’ followed finmin’s investment diktat till recently.
But Finance Act of 2006 forced these PFs to register with EPFO and seek fresh exemption to retain tax sops. Finmin is irked that these funds are being asked to follow 2003 investment pattern to get ‘exemption’

WHAT NOW

Labour ministry has asked EPFO to respond. PF board’s finance and investment committee has been summoned for an emergency meeting on Wednesday

LETTER MISSIVE

Finance secretary has written to labour secretary saying that prescribing investment pattern for PFs is in finmin’s domain He has also asked labour ministry to adopt the 2008 investment pattern urgently as it fetches higher returns
EPFO fund managers pitch for Street foray

Three years before that, the finance ministry’s investment pattern for provident funds said that up to 5% must be invested in the stock market, something the EPFO declined to accept. It has been debating for months now whether or not to accept the 2008 rules, but has reached no conclusion. It now operates under rules framed seven years ago and has rejected several suggestions by the finance ministry that a portion of its money should be invested in the stock market.

At a meeting of EPFO’s finance and committee last month, its four fund managers — SBI, HSBC Asset Management Company, ICICI Prudential AMC and Reliance Capital AMC — made a pitch to route a small portion of its corpus to Dalal Street.

They said that the 8.5% return will be difficult to attain in future unless norms change. The finance and investment committee is the EPFO’s top advisory body. It will meet again on Wednesday to discuss the investment pattern question and frame a response to the finance ministry.

An official in the provident fund organisation explained that the investment returns cited by Mr Chawla for the New Pension System are “notional” because they are based on net asset value. Moreover, it is subject to market volatility. Investments from the Employees Provident Fund, on the other hand, are “actually realised” , and there is no risk of capital erosion, he argued.

Mr Chawla wrote that although there is no long-term evidence of the comparative performance of funds, there has been empirical evidence of the existence of equity premium in India. “The problem of volatility in asset returns on equity could be addressed by a lifecycle type investment approach,” he wrote.

SOURCE - ET