In today’s DNA Mukul Asher & Amarendu Nandy argue that the Employees’ Provident Fund Organisation (EPFO) is ill-equipped to fulfil its mandate of providing retirement income security.
The EPFO is an unusual national provident fund in combining the features of a defined benefit scheme (Employees Pension Scheme or EPS, introduced in 1995) with those of a defined contribution scheme (Employee Provident Fund, or EPF) for its members. While the EPF balances can be withdrawn as a lump sum, the EPS is a pension scheme, with survivor benefits.
The EPS scheme is badly designed, as it fixes (defines) both benefits and contributions. This is mathematically impossible. As the scheme parameters change over time, either benefit formula and/or contribution must be changed for financial sustainability. If both are fixed, the scheme cannot be sustainable. This is demonstrated by the reported under-funding of Rs 25,000 crore, equivalent to one-sixth of its total assets. Moreover, in the absence of reforms designed to match its long-term assets and liabilities, the under-funding is expected to grow rapidly.
Contrary to normal financial practices, the EPFO Board deliberates on the interest rate to be paid to members at the beginning rather than at the end of the financial year. The EPFO trustees, grossly neglecting their fiduciary responsibility towards members and the taxpayers, have been engaged in attempting to secure through political and administrative means higher interest rates for the members than what their unprofessional and uninformed investment policies permit the funds to earn. From a national point of view, budgetary support to EPFO is not likely to benefit the aam aadmi, as 85% of the members had balances of less than Rs 20,000, accounting for 17% of total balances.
India’s stock market capitalisation exceeds $1 trillion. The depth and breadth of its financial and capital markets, which permit market-based efficient intermediation between savings and investments, are among India’s most important competitive strengths. That the board of trustees of India’s largest NBFI consciously refuses to utilise this competitive strength is astonishing. Even more astonishing is the argument made by trade union members of the board that such refusal is in the interest of the workers and the country. [DNA India]