Tuesday, December 12, 2006

EPFO interest rate controversy

Before we go into the controversy let us take a look at what is EPFO and what it is mandated to do in the first place.

The Constitution of India under "Directive Principles of State Policy" provides that the State shall within the limits of its economic capacity make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old-age, sickness & disablement and undeserved want.

The EPF & MP Act, 1952 was enacted by Parliament and came into force with effect from 14th March,1952. A series of legislative interventions were made in this direction, including the Employees' Provident Funds & Miscellaneous Provisions Act, 1952. Presently, the following three schemes are in operation under the Act:

  1. Employees' Provident Fund Scheme, 1952
  2. Employees' Deposit Linked Insurance Scheme, 1976
  3. Employees' Pension Scheme, 1995 (replacing the Employees' Family Pension Scheme, 1971)

The Employees' Provident Fund Organisation, India, is one of the largest provident fund institutions in the world in terms of members and volume of financial transactions that it has been carrying on.

The EPFO covers the organized labour force which comprises no more than 7 to 8 % of total labour force in India. As at the end of March 2003, there are about 394.98 lk employees covered under the EPFO schemes. They have contributed an amount of Rs. 11,388.14 cr during that year and the cumulative corpus was about Rs. 1,08,510.14 cr during that period.

The labour force pays a certain portion of its monthly earnings as PF contributions to the EPFO. The Central Board of Trustees of the EPFO declares interest rate on these contributions every year. If the EPFO’s investments are not yielding it a return equal to the administered rate of return, the EPFO has to dip into its reserves to keep the contributors satisfied. The contributors’ cause is always championed by the Left who want a rate which is more than the market rate. Last year the rate was 8.5%. This year also they want it to be maintained at the same level. Unable to decide about the administered rate to be declared, the EPFO simply left it to the PM to decide. The PM as usual will be forced to satisfy the political allies and declare an acceptable return or maintain it at the same rate as last year.

Everybody admits that the system of administered rates has to go; but nobody is able to bell the cat as it would be politically suicidal. Then what is the way out? ET argues that if we had alternative in the form of a modern pension system in place, that would allow reform on the EPFO front.