As always, the Employees Provident Fund Organisation’s extended annual ritual to decide the EPF interest rate has deflected attention from the core issues. The only reason for the EPFO to exist is to provide optimum retirement benefits to its members. For this, it needs to maximise returns under the Employees Provident Fund and improve its ability to meet its commitments under the Employees Pension Scheme (EPS). While the EPFO board was passionately fighting to obtain the 8.5 per cent rate for 2006-07, mutual funds delivered a return of over 16 per cent last year. Though it is difficult to fault the concerns that the board harbours for its constituencies, its energies are directed at the wrong end of the stick.

As things stand, even if EPFO somehow managed to earn a 15 per cent return, would it really matter? EPFO’s data for the year 2000-01 reveals that nearly 85 per cent of accounts have a balance of less than Rs 20,000. This implies that many low-income workers are using EPFO as an umbrella savings scheme rather than a retirement plan. While bank credit is more easily available today, members are continuing to dip into EPF, implying that irrespective of whether the returns are 9.5 or 8.5 per cent, they are consigned to very low replacements. Subsidised returns will mainly benefit the higher income workers covered by EPFO — the 15 per cent who own over 80 per cent of the assets. The unions are fighting for rich workers.

So do we need EPFO? EPFO has been unable to fulfil its basic purposes. Consultants have been hired but the all too obvious recommendations — making withdrawal stricter and improving investment parameters, among others — have been politically queasy and remain unimplemented. Globally, the inability of retirement savings funds to offer assured returns have been realised, and the expectations have shifted to competitive fund management to offer the best possible returns. India has the best fund management capacity in the world. Late last year, the Coal Mines Provident Fund Organisation auctioned the fund management of its assets of Rs 20,000 crore to ICICI Securities.

... contd.