Ending improvidence

After over two years of dithering on a plan to break the State Bank of India's monopoly in managing the investments of another monopoly — the Employees' Provident Fund Organisation (EPFO) — the government has finally done it. Last week, Labour Minister Oscar Fernandes cleared the appointment of three new private sector fund managers to manage the EPFO's monies along with the SBI.

All employee unions, except the Congress-affiliated INTUC, have opposed the move. The Left parties are particularly annoyed at Reliance Capital's last-minute entry into the final list of appointees. The unions are not alone: the dozen-odd fund managers who missed the final list are also fuming. Two bidders are upset as their offers to manage the money at zero fees were disqualified. A few others question the entire selection process — the way the technical scores were arrived at, how the final selection seemed to reflect a thinking that any fund manager would do as long as they are cheap, and so on.

Some have labelled the move as foreshadowing big-ticket financial sector reforms from the UPA in its last few months, and are also claiming that competition among the new fund managers will boost the EPF rate from the currently abysmal 8.5 per cent, as the government has sought to suggest.

But it's not that simple. The real stakeholders — who have 24 per cent of their current income mandatorily deducted towards EPFO's three schemes in the name of old-age security — must not get taken in by the glib talk. The move is nothing but minor tinkering; it may increase yields on PF monies by 10-20 basis points at best, but it makes for good optics.

Consider this: when interest rates on government securities had slipped to around 7 per cent in 2002, the EPFO was paying out 9.5 per cent. Today, when risk-free bank deposits earn nearly double-digit returns, the EPFO is struggling to pay 8.5 per cent. This is because when the EPFO invests in a security, it is required to hold it till maturity. So when interest rates are falling and securities with older coupon rates earn a premium, the EPFO can only sit back and watch.

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