PF contributions slipping, cloud over ‘pay-as-you-go’ model

Contributions to the Employees' Provident Fund Organisation (EPFO), the country's largest and only social security fund for formal sector workers, has slipped into negative territory for the first time in years, with officials and analysts saying that it could be yet another red flag for an already sagging economy.

The bad news is largely due to the fact that many workers have been pushed out of the mandatory EPFO net as a number of states have raised minimum wages, even though the Rs 6,500 mandatory wage limit for PF contributions in force since 2001 remains unchanged. Besides, with an increasing number of workers coming into the job force as contractual employees, they are out of the PF net.

With a Rs 5-lakh crore corpus, the fund is still the country's second largest non-bank financial institution after the Life insurance Corporation of India. But officials feel a crisis could be brewing behind the numbers as contributions have begun to dip over the past two years, while enrolments are also turning sluggish. The trend, which was first noticed in 2010-11, is now being confirmed as the EPFO finalises its balance sheet for 2011-12.

In 2010-11, the EPFO registered a growth of just under 5 per cent in enrolment of new members to take the total membership to 6.15 crore, as compared to a growth of nearly 25 per cent in the previous fiscal. More worryingly, contributions to the Rs 4.7-lakh crore corpus dipped by close to 3 per cent in 2010-11, as compared to a whopping 70 per cent growth in 2009-10. This massive jump, officials said, was in part due to the large numbers of workers hired temporarily in connection with the Commonwealth Games. ( See Chart)

A dip in contributions could also, in the long term, put a question mark over the EPFO's current model of functioning as a 'pay-as-you-go' system, where the fund uses its capital to service returns that are due. In practical terms it means that payments to current beneficiaries are taken care of through fresh contributions by way of new enrollments into the system.

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