With current conditions pointing to a much more cautious mood globally, there is no reason why the EPFO ​​should continue to offer subscribers high interest rates.

The decision of the Central Board of Trustees of the Employees’ Provident Fund Organization (EPFO) to lower the interest rate for its pension savings plan from 8.5% to 8.1% for the current tax regime is a sensible one, even if it states the middle class of the scheme disappoints. – class subscribers. The EPFO ​​has reportedly cited the current earnings position as the reason for the cut. That is indeed the case, as 5-10 year SBI deposits yield only 5.5%; the rates for popular small savings schemes such as Public Provident Fund and Sukanya Samriddhi scheme are 7.1% and 7.6% respectively. Obviously, the EPF offers much higher returns that have been unsustainable for some time.

The EPFO ​​invests the majority of incremental contributions in government debt – while the average 10-year G-sec return over the past 10 years has been 7.31% (currently 6.85%), EPFO ​​has subscribers on average almost 8.6% given. Of course, it has been able to do this because of long-term debt investments in the past that had to be held to maturity with interest rates as high as 12%.

Given the current conditions that reflect a much more cautious mood globally, there is no reason why the EPFO ​​should continue to offer subscribers high interest rates; even at the rate of 8.1%, it would pay out Rs 76,000 crore in the current fiscal year, leaving a marginal surplus of Rs 450 crore. Indeed, as the Union Minister for Labor has stated, given his role as a social security provider for its 65 million subscribers, he is in a straight jacket in his choice of investments, with exposure to risky investments (read equity-related instruments ) with a maximum of 15% of its investable corpus. The current environment is too fragile, with the pandemic and now the Russian war against Ukraine bringing a lot of uncertainty.

The EPFO ​​took a double whammy from the pandemic, with lower revenues for the fund exacerbated by subscriber-initiated withdrawals in the face of financial difficulties and loss of revenue. According to a report by Indian Express, it has settled nearly 5.7 million advance claims as of December 31, totaling more than Rs 14,300 crore. The need for the fund to be sustainable, especially with its guaranteed return model, cannot be emphasized enough. The best subscribers could wish for right now is a strong recovery in the stock markets, so that revenues from that part of their contribution will grow. Debt investments that provide stability cannot and should not offer a return higher than the bank interest rate. If their deposits were to become less attractive and savings flow elsewhere, banks would be prevented from cutting lending rates, which would then affect the country’s investment climate.

As salaried subscribers protest the move, remember that the unions representing them in the EPFO ​​were vehemently opposed to equity investment just seven years ago. Even now, after announcing the latest move, a union representative is quoted as saying that “playing with financial markets” will not secure the future of subscribers. That the National Pension System (NPS), which allows equity investments of 50-75% of a subscriber’s contribution, has clocked an average return of 10-12% over the past 10 years, should offer some perspective. Those seeking higher returns, with an appetite for additional risk, should have been able to transfer their retirement savings to the NPS, something former Treasury Secretary Arun Jaitley envisioned. His proposal has of course been up in the air ever since and the chances of it seeing the light of day are slim given the legislative change that is needed.

This post A wise decision: EPFO ​​has long yielded unsustainable returns

was original published at “https://www.financialexpress.com/opinion/a-sensible-decision-epfo-has-been-giving-unsustainable-returns-for-long/2462085/”