## Wednesday, July 25, 2007

### The woes of EPFO

Business Standard has a great editorial on the woes of EPFO:

Now that the inappropriately-named Interest Suspense Account (all incomes are deposited here, and it remains in suspense till it is credited in members accounts) has come to the rescue, and the Employees Provident Fund Organisation has managed to find Rs 450 crore extra in this account in order to pay 8.5 per cent interest for 2006-07 to workers whose forced savings have been kept with the EPFO, you can safely assume the governments interest in the EPFO is over for another year. That is unfortunate; each year that critical reforms are postponed, the problems of the EPFO (which comprises the Employees Provident Fund and the Employees Pension Scheme) get more acute. There is also the larger problem that while energies are consumed in getting a better deal for the very small proportion of Indias workforce which has EPF accounts, the government has still not come out with a new pension system with central record-keeping that would allow account holders to choose pension fund managers and access their accounts at the click of a mousearound 15 million of the 40 million EPF accounts are dormant, a large number of individuals have more than one account, and only 7-8 per cent of accounts have balances of over Rs 50,000.

As for the EPF itself, it functions on antiquated software (few other organisations in the world still use Foxbase) and still uses the single-entry book-keeping system, which makes the organisation quite vulnerable to fraud. While the EPFO had planned to modernise nearly 100 of its 115 offices by April and switch to double-entry book-keeping and more modern software with a web interface that would allow account holders to access their balance online and withdraw funds within three days, the project is still stuck at the pilot phasethe latest plan, if all goes well, is that offices which account for 60-65 per cent of accounts will be online by April next year.

Then there is the problem that, while looking for more interest income for members each year, the board refuses to clear a proposal to invest 5 per cent of EPFO funds in the stock market, which, in the long run, offers unmatched risk-adjusted returns. Indeed, with institutions like ICICI Bank and IDBI no long public sector financial institutions, the EPFO is even running out of investment options, but the board has not cleared investments in corporate bonds; nor has it cleared a proposal to allow trading in securities though the EPFO is allowed to trade 10 per cent of its securities while it holds the rest on a hold-to-maturity basis. This attitude ensured, for instance, that when even the car cleaner knew that IFCI was going bust, the EPFO continued to hold on to its IFCI deposits.

The other, and growing, problem for the EPFO, is the EPSwhile the EPF corpus of Rs 100,000 crore is greater than the Rs 75,000 crore under the EPS, the way the latter is growing, it will outpace the EPF in another two years. Thanks to pension fund plans that were designed when interest rates on fixed deposits were over 15 per cent per annum, the EPS has a huge asset-liability mismatch, which was around Rs 22,000 crore in 2003-04there has been no assessment after that! The solution to this is no secret: reduce some of the pension benefits such as early withdrawal and increase the retirement age till which pension contributions are made by two years (this also reduces the number of years of pension by two years). Yet, the board refuses to take a decision on the mattereach year, the hole in the EPS increases by Rs 3,000-4,000 crore. Disaster stares the EPFO in the face. But neither the labour minister nor the trade union members who focus on asking for higher interest payments seem to be concerned.

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