India’s Employee Provident Fund Organisation (EPFO) is reportedly considering a proposal to allocate more funds to equity investments due to underwhelming returns on its debt holdings. The Finance Investment and Audit Committee is advocating for a gradual increase in the cap on stock investments from 15% to 25% of incremental inflows. The EPFO trustees are expected to deliberate on this idea later this month. This development follows the finance ministry’s approval of a reduced payout of 8.1% for the year 2021-22, down from 8.5% in the previous year. While this adjustment may cause concern among subscribers relying on PF savings for retirement security, it still offers a comparatively higher rate given the current low-rate economy where banks struggle to provide competitive returns.
To sustain premium payouts, the EPFO recognizes the need to diversify its portfolio beyond debt holdings and explore the potential of investing in a larger share portfolio, a strategy adopted by pension funds worldwide. However, it is important not to rush into such a decision without careful consideration.
EPFO’s Equity Investments: Transparency and Skill Acquisition are Key
While returns from debt investments often fail to surpass inflation, especially without active management, allocating funds to equity has the potential to provide a much-needed boost. However, it remains uncertain whether the EPFO has acquired the necessary skill sets to effectively navigate the equity market. Initially starting with a 5% equity limit in 2015, which was subsequently increased to 15% in 2017, the performance of EPFO’s equity portfolio remains a mystery, with only broad surplus numbers being made available, and these have been underwhelming in recent years. Before considering further expansion, it is crucial to address this lack of transparency.
Employees who contribute a portion of their salaries to the fund deserve to be better informed about its operations. Concerns arise not only from doubts about the EPFO’s ability to select assets that maximize value but also from potential conflicts of interest that may arise due to the government’s agenda, such as disinvestment. Similar patterns have been observed with other state-owned entities, where purchases often align more with state goals than customer interests. Currently, the fund’s equity portion is reportedly held through specified exchange-traded funds, which sounds relatively secure. However, what is needed is full disclosure, openly stated for everyone to track. Otherwise, subjecting a larger portion of our savings to the uncertainties of the stock market would be unwise, particularly during these volatile times.
EPFO’s Focus on Safety and Yield Amidst Changing Economic Landscape
The fundamental promise of any fund, including the EPFO, must prioritize safety. It is crucial for the EPFO to ensure that investment risks remain within acceptable limits while delivering satisfactory returns to its subscribers. Continuously diminishing returns are not sustainable and need to be addressed.
Undoubtedly, offering premium rates can disrupt the credit market by diverting discretionary savings that could have been utilized for more productive purposes through bank lending. Lenders have valid concerns regarding deposits being attracted to PF top-ups and other high-paying government schemes. However, recent limits on top-ups have mitigated this effect to a certain extent. Additionally, while it may affect the effectiveness of India’s accommodative monetary policy by widening the interest rate gap and diverting savings away from banks, higher PF awards should not be a concern if bank interest rates are on the rise.
