Repeating UTI

Prime Minister Manmohan Singh's warning to the trade unions couldn't have been better worded. As he has said, if things carry on as they are, the Employees Provident Fund (EPF) could soon be going the UTI way.

Intuitively, almost everyone who is a trade union leader has wanted Dr Singh to hike the interest on the EPF to a mindboggling 12 per cent. But while the Special Deposit Scheme (SDS), in which the bulk of EPF funds are parked, gives a return of only 8 per cent the EPF gave its members a 9.5 per cent return last year.

Till date, no one is clear on how the EPF managed to do this, though some suspect (and the EPF denies it) the organisation may have dipped into PF accounts that no one collects (either the contributors have died, or they've just moved jobs and not bothered to transfer their funds).

What makes things worse is that since the SDS has been frozen, and is not accepting any fresh accretions, all new monies collected by the EPF have to be invested in other securities, few of which offer more than 6 per cent interest.

The only way to sustain higher returns in such a situation is for PF managers to buy junk or near-junk bonds, and there is some anecdotal evidence that this is indeed what is happening in even the privately run provident funds that have, by law, to match the EPF's returns.

This is a route to disaster, as the EPF's fund managers are simply not in a position to ensure security of capital, and they are playing with salaried employees' life savings.

Even more scary than the EPF, of course, is the Employees Pension Scheme (EPS) which guarantees a pension equal to half the member's last drawn salary (subject to a ceiling).

Since interest rates have fallen considerably from when the scheme was first formulated, the scheme already has a huge hole "" as reported by this newspaper, there is already a Rs 1,700-crore gap between what the scheme has promised and the funds it has on hand.

And this hole can only get bigger. Indeed, last year in April, a finance ministry functionary made a presentation on pensions in Colombo and talked of the "non-sustainability of pension schemes such as the EPS".

Though well-intentioned, the pilot scheme for pensions for unorganised sector workers, is also vastly underfunded, apart from being too expensive to administer.

In this case too, actuarial calculations say the scheme is viable, but no independent experts have had the opportunity to verify these claims.

The question is, what can Dr Singh do? Cutting rates for the EPF as well as for other small savings is copy-book stuff, but looks difficult given the composition of the government as well as the fact that interest rates are likely to harden.

A more politically viable solution, under the circumstances, may be to use the opportunity to bring genuine transparency into the operations of the EPF and EPS, to allow independent experts to examine these accounts as well as the actuarial assumptions made in various schemes.

This may also be a good time to see whether the old system of forcing the EPF to hold bonds till maturity is really a good idea "" the EPF, for instance, has been holding on to IFCI paper for years, though everyone else was offloading it when the institution slipped into crisis.