Advance notice on EPFO rate of return unlikely

The Ministry of Labour's decision to examine whether or not to implement the revised investment norms for provident funds managed by the Employees Provident Fund Organisation (EPFO) could result in the assured rate of return not being declared in advance.

This comes on the back of uncertainty in returns from direct equity investments, and those linked to mutual funds as well as provident funds having to mark to market their portfolio.

"Advance declaration of guaranteed return on Employees Provident Fund Organisation (EPFO) and exempted funds will not be possible if they are to subscribe to the revised investment pattern," said official government sources.

If the labour ministry endorses the notification on the new investment pattern of PFs, issued last week by the finance ministry, then EPFO and exempted funds will have to follow the revised investment pattern, they added.

This is a normal practice wherein the MoF first comes out with regulations and at a later stage the ministry of labour notifies it denoting its approval.

This time round, aside from notifying the changes in investment norms, the labour ministry will also need to modify the structure, moving away from an assured rate of return.

The finance and investment committee of the EPFO will meet next week to examine the issue and discuss the impact of investing in the equity market.

The study of the impact will be put before the full 43-member board of the EPFO, which will meet on February 15.

The EPFO is the largest provident fund in India, managing close to Rs 1 lakh crore of employees' retirement savings. Today it declares the assured rate of interest for the financial year well in advance.

This comes on the back of investments in debt paper, where returns are assured. In contrast, return on investments in equity or mutual funds are not certain.

The revised investment norms allows for a 5 per cent investment in equity, optional 10 per cent investment in equity-linked mutual funds and trading of 10 per cent of one's government securities portfolio.

The fund would need to create an additional fund to absorb shocks. It is not possible to quantify what could be EPFO's and exempted funds' liabilities when investments are made in risky and not secured assets, they added.

Today the EPFO and exempted funds are liable to pay at least 8.5 per cent annual return to the employees of the trusts. This is still an interim decision and the guaranteed return could rise to 9-9.5 per cent once the government takes a final view.

Officials further raised apprehensions over the ability of EPFO to remain insulated from interference by bureaucrats and politicians.

They cited instances of leading financial institutions in the country today being used to prop up the market. Others questioned the ability to trust State Bank of India (SBI) which today manages EPFO's corpus of funds.