EPFO not favouring full pension plan for exempt organisations

23 November 2017

A meeting of the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO) in New Delhi today is expected to decide on an exit policy for its equity investments but will not take a decision on the EPF interest rate for 2017-18.

The EPFO is also yet to make its stand clear on pension on full salary to employees of exempt companies as directed by the Supreme Court in its order dated 4 October 2016.

While the CBT's decision on EPFO's exit policy will spell out ways to monetise its stock exposure to benefit subscribers, members are expected to oppose moves to implement the SC order regarding pension on full salary instead of the current pension based on individual contributions.

The CBT at its 215th meeting on 8 December 2016, had decided that members of exempted organisations will be given pension on full salary provided they transfer the differential of contribution on the full salary and the ceiling amount with interest from the EPF account to the EPS account, which is managed by the EPFO trust. If the person has already retired, he will have to deposit the money with interest at the rate fixed by the EPFO every year.

On the basis of the CBT's decision, the EPFO moved the ministry of labour and employment (MOL&E) for its approval, which it received on March 16 this year.

After receiving the government's approval, the EPFO issued a circular on 23 March to give pension on full salary to EPS members. "Accordingly a proposal was sent to MOL&E to allow members of the Employees' Pension Scheme, 1995 who had contributed on higher wages exceeding the statutory wage ceiling of Rs6,500 in the provident fund to divert 8.33 per cent of the salary exceeding Rs6,500 to the pension fund with up to date interest as declared under EPF Scheme, 1952 from time to time to get the benefit of pension on higher salary on receipt of joint option of the Employer and Employee.''

The EPFO will decide an exit policy for its equity investments but is not going to decide on the EPF interest rate for 2017-18 in the meeting, reports quoting labour secretary M Sathiavathy said.

''The CBT will take up the exit policy of EPFO's equity investments and whatever they decide, the fund managers of EPFO will follow,'' Sathiavathy said.

Sathiavathy, however, said the board will not take up the PF interest rate issue this time and that it may be taken up sometime in January.

The EPF interest rate for this year has garnered a lot of interest after the central government slashed interest rates on several small savings schemes including government provident fund and public provident fund.

With a 8.65 per cent pay out, EPF yields higher interest than other provident funds which are now fetching 7.8 per cent. But with debt investment fetching lower returns, the EPFO is likely to lower its interest rate by up to 25 basis points, Mint reported on 6 July.

Some in the government believe that lowering the EPF interest rate will further bolster criticism of the government ahead of the assembly elections in Himachal Pradesh and Gujarat, the second government official mentioned above said on condition of anonymity.

CBT, headed by the labour minister, is the apex decision making body of the EPFO. It comprises representatives of the central government, state governments, employers and employees.

Currently, EPFO invests 15 per cent of its annual accruals in exchange traded funds (ETFs) but it's not yet clear how it plans to credit the benefits or losses to subscribers' accounts. EPFO has invested over Rs30,000 crore via ETFs since it started investing in stocks in August 2015-16.

One of the options the labour ministry-controlled EPFO is mulling is accruing units of ETFs to subscribers' accounts. Another option is keeping cash and equity components separately-meaning that consent to sell off ETF units is required from a subscriber withdrawing EPF savings.

The retirement fund manager is also mulling whether it can offer an option to subscribers to opt for equity exposure beyond the 15 per cent cutoff, the second government official said.

However, the EPFO is likely to face opposition from representatives of workers unions who are on its board. ''The workers whose money EPFO is managing need to know what is the benefit they are getting because of the equity investments. Unless you have an exit policy then how will you quantify the growth of your investments,'' said Virjesh Upadhyay, a CBT member representing employees.

He said the workers expect EPF interest rate not to go down and that any plan to invest more money than 15 per cent will be opposed vehemently.

EPFO manages a retirement corpus of over Rs.9 trillion and has a subscriber base of over 45 million.

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