Rate hike to bypass 85% EPF members

Even though there are four crore employees' provident fund (EPF) account holders, not every one will get to reap the benefits of the 9.5 interest rate during old age; only those relatively well-off will. This has been indicated by finance ministry sources and experts.

"About 2.93 crore EPF members accounting for 84.6 per cent of the membership have balances less than Rs 20,000 and own only 16.98 per cent of the total accounted corpus. While a high rate of interest is not of much benefit to a vast majority of account holders, it does benefit the 15.4 per cent members who have large balances and own over 83 per cent of the total accounted corpus," a finance ministry official said.

"A high interest rate does not serve a large social purpose as the scheme itself has failed to serve its intended purpose of providing old-age security to a large number of members," said an expert who has been closely working on pension reforms.

"So, are the benefits of the Rs 900-odd crore deficit the EPF Organisation is staring at going to intended beneficiaries? That is a question the government and the people, who are seeking a higher interest rate, must ask now," said the expert.

"While asking the government to foot the deficit on account of 9.5 per cent interest rate might be justified, the EPFO could probably look at differential rates as a viable strategy," he suggested.

For example, if the 9.5 per cent interest rate is offered only for the balance up to Rs 50,000 and if interest above that amount is linked to the market rate, then it will take care of the social objective of providing security to about 90 per cent of the members, the expert felt.

"While this move would make the EPFO unattractive for the 'creamy layer', it would also bring down the interest burden if the statement that 'eighty per cent of the corpus of the EPFO belongs to 20 per cent of the people' holds true," the expert said.

Another misconception is related to the large number of account holders. About 1.76 crore accounts are inoperative. So, effective coverage of the EPF scheme is low.

Further, more than 95 per cent of final provident fund settlements every year occur on account of resignations and not on account of superannuation, another indicator that the scheme has not served its purpose.