EPF rate hike to deplete reserve fund

Rs 950 cr corpus will shrink to rs 144 cr

The Employees Provident Fund Organisation's decision to use the special reserve fund for meeting the Rs 716 crore deficit on account of a 9.5 per cent interest rate for 2004-05 may create a couple of problems for the organisation.

Labour ministry officials told Business Standard that the Rs 950 crore fund would be left with only about Rs 144 crore after the deficit was met.

"The EPFO can, in future, pay only that interest rate which is not commensurate with the returns on investment since the fund has a very small corpus now," said an official.

The special reserve fund comprises the kitty that is created when an employer's contribution to EPF is received after an employee quits the scheme.

The other problem which may arise will be that the EPFO will have no contingency fund in the event of defaults by employers.

According to officials, this is not the first time that the EPFO will be accessing the special reserve fund.

"When the previous labour minister, Sahib Singh Verma, announced a 0.5 per cent additional interest payment on account of EPFO's golden jubilee year in 2003-04, the organisation had to access the fund," said the official stating this was not a healthy practice.

With the central board of trustees deciding on a 9.5 per cent interest rate on Saturday, the government is likely to issue a notification for 2004-05 after a similar notification was issued for 2002-03 and 2003-04. Officials said the board of trustees was likely to meet in June to decide the interest rates for the current year.

Finance Minister P Chidambaram had earlier this year announced a 9.5 per cent interest rate for three years starting April 2002 after pressure from the Left parties.

The board of trustees had recommended a 9.5 per cent interest rate for 2002-03 and 2003-04 but the finance ministry had refused to approve the same. This led to the rates being not notified.

The board of trustees had not recommended any interest rate for 2004-05 though Chidambaram made the announcement.