EPF payout rate may be reduced to 8 per cent

The largest state-run pension fund may have to cut its assured return on the Rs 90,400 crore it manages as its investments earn less income than the payout, said Labour Minister Oscar Fernandes.

"We have money to pay only 8 per cent in the current fiscal. We face a deficit of Rs 450 crore if we pay a rate of 8.5 per cent,'' said Fernandes.

The Employees' Provident Fund Organization, which is seeking its trustees' permission to invest in stocks, earns 8 per cent on deposits in the government-run special-deposit plan, where four-fifths of the assets are invested.

The finance ministry wants interest rates to decline in the economy as a whole to keep borrowing costs low and spur economic growth.

"If you see it from the economic point of view, the rates should be reduced in line with the interest income of the fund,'' said Harish Menon, an economist at ING Vysya Bank Ltd.

The pension fund "should take a flexible view in investing in equities as that will ensure higher returns.''

The government in January last year cut the rate to 8.5 per cent for the fiscal year ended March 31, 2006, from 9.5 per cent. The fund, which paid 9.5 per cent in the previous three years, had to cut the rate to prevent an erosion in its reserves.

The fund, which is essentially a savings plan for its 40 million members and provides them with retirement benefits or social security if they have to leave a job, earned interest of Rs 6523 crore last fiscal and had to tap its reserves to meet a Rs 366 crore shortfall to pay the 8.5 per cent rate.

The Central Board of Trustees, a panel that governs the pension fund is likely to meet in the last week of January to recommend the interest payout for this fiscal and take a decision on investing a part of the fund's money in the stock market, Fernandes said.

The board's recommendation in December 2005 to cut the rate by a percentage point was met with protests by the government's communist allies, whose support is essential for the government to maintain its majority in the lower house of parliament.

"We are opposed to any reduction in the rate given the fact that even regular fixed deposits offered by banks with a maturity of one to two years are offering returns of as much as 8.5 per cent,'' Hasubhai Dave, a worker union leader said from Rajkot.

State Bank of India, the country's biggest commercial bank, ICICI Bank Ltd, the second largest, and other lenders have raised deposit rates to garner more deposits in an attempt to match loan growth in the world's second-fastest growing major economy.

The Labor ministry isn't "opposed" to the idea of maximising returns by investing some money in stocks, Fernandes said. "We have permission from the finance ministry to invest as much as five per cent of the fund in the stock market.''

The move will allow the pension fund to take advantage of a surge on the Bombay Stock Exchange. The benchmark index, which climbed for a fifth straight year in 2006, has set a series of records since rebounding from its lows in June, boosted by an expected economic growth of 9 per cent in the fiscal year ending March, 2007. The index rose to a record 14,014.92 on January 3.

"There is a lack of consensus on investing a part of the fund's money in the stock market as some members feel that there is an element of risk involved in that,'' Fernandes said.

The government should pay a higher rate on investments made in its special-deposit plan rather than allow the fund's money to be put into stocks as it is risky, Dave said.

"All the workers' unions are opposed to investing in stock markets as there is no guarantee of returns on investment in markets,'' Dave said.