The EPFO's Idea of Paying A Bonus To Subscribers Is Not A Prudent One

The Employees Provident Fund Organisation (EPFO), not always the best manager of your retirement funds, wants to pay a bonus of around Rs 750 crore to subscribers in 2015-16 since it believes it has the necessary surpluses. The other option is to raise the return to 8.95 percent from last year’s 8.75 percent.

The bonus, if approved by the trustees and the finance ministry, will be paid out to subscribers who have contributed at least for 12 months continuously – which means only about half the members will get the return, The Economic Times reports.

In theory, giving a one-time bonus is better than raising rates overall at a time when bond yields are likely to trend down. It is unlikely that the EPFO can earn nearly nine percent return again this year or in the future, except due to capital gains as bond yields drop. The best private sector debt funds are still struggling to top eight to nine percent return this year, thanks to bond market volatility. So a one-time bonus is better than raising the benchmark of returns to levels that are unsustainable.

On the other hand, the idea of giving double-digit returns to half the subscribers (which will be the net result of paying out the bonus) and the normal rate to others smacks of unfairness. Why should late entrants to the EPFO be denied the same return?

However, the real reason why the finance ministry should stay the EPFO’s hand is prudence. In a falling interest rate scenario, and especially as its equity investments are unlikely to bear high returns in the short run, the EPFO should conserve its resources and spread the payout of surpluses over the medium term so that year-to-year fluctuations in returns are smoothened.

In 2010, the EPFO suddenly announced it would pay 9.5 percent for 2010-11 as it had discovered a surplus of Rs 1,731 crore in its “interest suspense account”, thanks to having adopted a wrong way of calculating accrued interest since 1993. The next year the rate was down to 8.5 percent.

The point is not about whether EPFO had a surplus or not. It is about whether an organisation which can make such fundamental calculation errors adding up to Rs 1,731 crore should be given the sole responsibility for managing the funds of five crore subscribers, and a corpus of around Rs 7 lakh crore. Rs 1,731 crore is not a rounding-off error in a corpus that was then estimated at over Rs 3 lakh crore.

Thankfully, since 2004 (and especially after 2009, when the scheme was opened to the public), the EPFO has competition from the National Pension Scheme, which is managed by professional fund managers. Once the field is levelled, and the tax benefits now available to EPFO are also given to NPS, and if subscribers have the option to shift their funds from EPFO to NPS, the EPFO may find that it has to be more transparent and prudent with its surpluses. (The EPFO fund is tax-exempt for subscribers at the contribution, accumulation and withdrawal phase, but the NPS is taxed at exit).

The reason why EPFO has hidden surpluses is simple: many of the employees who change jobs fail to shift their accounts to the new places, and people who work for shorter periods may never claim their dues. If EPFO were to be audited forensically, one may well discover that a large proportion of its hidden surpluses are nothing more than funds belonging to unwary contributors from the past.

The EPFO’s current subscribers may be profiting from past workers who did not know how to claim their rights.