- The world community is not only staring at an extremely volatile situation coming on the back of successive novel coronavirus waves in the last two years but had to contend with the ongoing Russian invasion of Ukraine which is bound to have wide-ranging repercussions on several things including oil, gas, and other important commodities. Signs are visible where the economy of many countries is heating up owing to the unwanted conflict between the Russian and Ukrainian forces. The Indian economy too was showing palpable signs of recovering from the COVID-19 debacle during the last two quarters.
PC: ANJAN ROY
- Unfortunately, the ongoing conflict is all set to play spoilsport in the Union Government’s efforts to pull back the economy on expected lines. Against this backdrop, comes the news that the trustees of the Employee’s Provident Fund last week have recommended an interest of 8.1% on the fund’s accumulations for 2021-22, the lowest interest rate since 1977-78 when a rate of 8% was notified. However, blind comparison of interest rates over time can be misleading as the financial instruments available to EPF have been expanded to include equities. Note that EPFO had 46.2 million contributing members at the end of FY 2020-21.
- Its legal mandate covers three separate schemes, of which EPF and Pension Scheme are the most important. Of course, these two schemes are intertwined as the PF deductions and an employer’s contribution are spread across them. Further, returns on EPF are linked to the investment performance but the Pension Scheme is hybrid as there is a partial government guarantee built into it. Over Rs., 14 lakh crores at the end of FY21 was directed into debt instruments. About 50% of this is invested in the Government of India and state government debt. Thus, interest rates have trended downwards over the last three years and returns on EPF have followed suit.
PC: Michael Klimes
- The yield on debt investments was just 6.8% in 2020-21. As such, how does EPFO declare returns over 8%? Mind you, the extra return comes from investing up to 15% of the annual inflows into financial instruments linked to equities. The risk-return profiles of EPF and Pension Scheme have changed over the last few years. Intriguingly, there’s inadequate information on what’s happening to this retirement saving scheme, which is growing fast because of EPF’s mandatory nature and GOI’s subsidies to formalize jobs. Also, the publicly available data on EPFO’s investments is scanty heightening concerns on lowering returns when retail inflation is firming up, even though the broad logic of lowering the rate is right.
- As such, EPFO needs to be more transparent about the details of its investments. Moreover, the Pension Scheme needs timely actuarial assessments as there is a sovereign guarantee involved. These measures are urgently required as the number of organized sector workers as well as pensioners are going to grow since the markets and the economy will face many uncertainties for a while.
