[Editorial Analysis] EPFO needs to get it right

Mains Paper 3: Economy
Prelims level: EPFO
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

• The Employees’ Provident Fund Organisation (EPFO) has been under attack for its decision to give subscribers an 8.15% return on their FY20 investment right now and, another 0.35% in December once it is able to raise money from the sale of the investments in Exchange Traded Funds (ETFs) way back in 2016.

Reasons behind this plan:

• But, before analysing why EPFO has come up with this plan, keep in mind that it offers perhaps the highest return relative to most fixed-income investments today.

• While PPF offers a 7.1% return today, NSCs give a lower 6.8%, and SBI deposits of 5+ years are offering just 5.4%; the added advantage that EPFO has over bank fixed deposits is that the returns are tax-free.

• Indeed, even the 8.15% return has to be looked at in the context of lower inflation levels; sure, the return is amongst the lowest in 42 years, but with FY20 WPI-inflation a mere 1.7%, the real return is quite high compared to the past.

EPFO offers differs from NPS:

• The returns EPFO offers, however, are lower than that offered by the National Pension Scheme (NPS)—around 9-11% on debt instruments—and that is where EPFO needs to learn some lessons.

• For one, the reason why it is being forced to break up the 8.5% return promised in March after analysing its returns over FY20 is that the money was not credited to the accounts of subscribers, because the return has to be ratified by the finance ministry and it is only by September that the money is actually credited.

• Between March and September, if EPFO loses money—as it did, like everyone else, in the stock markets—it cannot possibly credit the full amount.

• The first lesson, then, is that the amount must be credited immediately.

• EPFO also needs to learn lessons from NPS. While NPS marks-to-market its bond holdings, EPFO does not; not only does this make NPS investments safer since there are no sudden surprises when the value of the portfolio suddenly plunges, this also means that NPS is able to make capital gains—also losses—when interest rates fall.

Decrease in return by EPFO:

• Indeed, while EPFO started investing in equity since August 2015 to earn more returns for its subscribers—while only 5% of incremental inflows were invested in equity initially, it is around 15% today—the policy of delaying payments has hurt the EPFO.

• Since stock market returns vary from day-to-day, ideally whatever return is decided upon has to be credited to subscriber accounts the same day; and before doing that, EPFO has to have the money with it.

Way ahead:

• Since it never did that, it is now in an unenviable position where, thanks to markets being choppy, it cannot fulfil its promise to subscribers.

• While EPFO tries to see how it is going to modernise its functioning, in line with what the then finance minister Arun Jaitley had promised years ago, subscribers must be given an option to switch to NPS for higher returns, low costs, multiple investment choices and transparent fund management.

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Prelims Questions:

Q.1) Consider the following statements:

1. The Ministry of Shipping has directed all major ports to procure or charter tug boats which are only made in India.

2. The proposed Standing Specifications Committee would shortlist around five variants/types of tugs and prepare a ‘Approved Standardized Tug Design and Specifications’ (ASTDS).

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Questions:

Q.1) What is the role of EPFO? What are the recent changes made in EPFO? What are the concerns with government’s move by giving higher returns to its subscribers ?

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