As a welfare fund for the working population, it should not be invested in the market at all; if the government insists on this, then it needs to provide subscribers some security.
Member, Central Board of Trustees, Employees Provident Fund
EPF managers should be free to invest in stock markets provided they get a sovereign guarantee. The government is afraid of taking even that much responsibility
Whether the government should invest Employees Provident Fund (EPF) money in the stock market is a question that is answered even before it is asked. It is amply clear to anyone who applies his mind to the matter that it is just not possible to expose the funds of the public to such risks in the hope of getting better returns. That is why I rule it out — unless the government can assure subscribers a sovereign guarantee.
There are three or four reasons investment in the stock market should be ruled out for EPF. Every year we have to declare interest rates to subscribers. If EPF money is invested in the market, and stock prices fall, what interest rates do you offer subscribers?
The government gives the example of the National Pension Scheme (NPS) to persuade people in favour of investing EPF money in the market. This is a bit like comparing apples with oranges. The two are totally different. NPS is a long-term investment and it stays there till one retires. Is that the case with EPF?
Again, those who want EPF money to be invested in the markets do not realise that the fund does not have the infrastructure for investment. Life Insurance Corporation, for instance, does have that infrastructure and it has been investing in the markets for years. We don’t have that. We started investments minimally in 2008 through fund managers. That is all we have. Talk of putting a huge part of the funds in markets has to be preceded by setting up the required infrastructure.
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Given the volatility in the Indian market, we are afraid of being unable to fulfill our responsibilities to subscribers, many of of whom are poor and for whom these funds are their sole investments.
Economic Affairs Secretary R Gopalan in his letter to the Labour Secretary says NPS fund managers managed to get returns of 14.82 per cent for subscribers while the EPF paid an interest of only 8.5 per cent to subscribers in 2008-09.
This comparison is baseless. The pension fund belongs to the government and it is a partner in it. So if there are losses the government has to bear them. But in the case of EPF, the government has refused to take any risks.
It has clearly said the Board of Trustees would be responsible if there is any problem as a result of stock market investment. So, we are not asking for any big guarantees. All we are saying is that EPF managers should be free to invest any amount in stock markets provided they get a sovereign guarantee of 8.5 per cent annual interest. That is not much. The government is afraid of taking even that much responsibility even as it pushes the EPF to invest in the market.
The government and the finance ministry are blind to the purpose of the EPF and this is reflected in their position on investments and guarantees. The finance ministry says the EPF should not be disrupted by periodic and intermittent withdrawals for loans, medical loans and so on. They say subscribers should take loans from banks instead. Poor people don’t have anything to mortgage when they approach banks. That is why they approach the EPF. The government overlooks these issues when it discusses the use and investments of the fund.
I don’t know if there are any precedents elsewhere in the world of welfare funds being invested in stock markets or even of guarantees being given. But we have only one position on this — that if there is any investment in a volatile entity like the stock market, then there must be sovereign guarantee. Public property cannot be subjected to risk without anyone guaranteeing a certain level of returns.
The writer is also National Secretary, Hind Mazdoor Sangh
(As told to Sreelatha Menon)
Chief Economist, Kasa Financial Group
The government cannot guarantee stock market returns for the Employees Provident Fund because it would face the problem of deficit financing
We need to look at the logic of having a provident fund (PF) system and that is designed to provide a comfortable retirement to working-class citizens. A PF is actually a social security savings plan in which the overall scope and benefits revolve around retirement, healthcare, home ownership, family protection and asset enhancement. Employees and their employers make monthly contributions to the Employees Provident Fund (EPF). EPF savings help subscribers in many ways even before they retire. Monthly contributions to one’s PF account help build up savings for healthcare needs. PF savings can be used to buy a home. Dependents are insured against the member’s permanent incapacity or death. Besides, PF investments help enhance one’s retirement savings.
Overall, a provident fund ensures that the citizen has a roof over his head when he retires and it’s fully paid for. It also helps meet medical needs when one grows old.
So it is clear that a citizen invests in PF for security, and that is the fundamental premise. Investing PF in the stock market defies the fundamentals of security since such market investments are speculative in nature. One may argue that investments would be made in the top companies but we must keep in mind that giants like GM can also go bankrupt. Ideally, the PF money must be invested in gold or commodities that are rare and will remain rare in the next 20 to 40 years. The question that arises is the rate of return. Though gold gives a very low annual return, its price grows by the rate of inflation. It would be wise for the government to pay the difference between the rate of gold appreciation and the inflation rather than speculate with the money and finally top up the losses when they occur in the long run. The case of UTI is well known and we would surely not want the EPF to be a UTI in the making.
I’m sure the government cannot guarantee stock market returns because it would face the problem of deficit financing. The government cannot speculate in all the world markets and cover its deficit. We must also keep in mind that the stock and currency markets are so unpredictable that the Reserve Bank of India faces a huge challenge in managing forex reserves.
The EPF should be run as a welfare system and not a profit system. If the government thinks of it as a welfare scheme, the rate of interest will not pinch it. It may be wise for the government to use this money for public welfare like building dams and roads and spending on environment and agriculture. All these investments will surely yield results that will be more than the 9.5 per cent the government is paying to EPF contributors. If the government were to invest in such development projects, it needn’t bother searching for investment avenues. EPF money should not be invested in the stock market, nor should the government guarantee any stock market investments.
EPF is a kind of fund that combines the features of a defined benefit scheme with those of a defined contribution scheme. Since both contributions and returns are well defined, it is much easier to manage such schemes. How will the government ensure that the fund managers do not make any investment where they have vested interests? We cannot leave the security of millions to the mercy of a few. While the government may try to appoint managers with an excellent track record, past records are no guarantee for the future. In the recent financial turmoil, we have seen some of the biggest names of the financial world going bankrupt. These funds belong to citizens and should be used to improve the country so that people can draw long-term benefits from them.