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The Employees’ Provident Fund Organisation (EPFO) should waste no time in changing the way it deploys employees’ savings. The 8.5% rate of return it has recommended for 2020-21, the same as in 2019-20, is above the interest rate on bank deposits and small savings schemes, but lower than that generated by the National Pension System. EPFO invests 85% of its corpus in debt, mostly public, its exposure to equity being capped at 15% of the corpus. That it is able to pay 8.5% rate of interest shows that the government is paying too high a rate of interest on its borrowing from the EPFO. Instead, it should mandate EPF to invest in a wider array of asset classes to diversify risk and maximise returns.
The yield on the 10-year g-secs is about 6.23-6.25%, around 200-225 basis points lower than the return on EPF. And there is no long-dated paper that yields higher returns. The wrong-headed, ultra-conservative investment rule is the main reason for the EPFO’s failure to maximise returns. That must change. Instead of the government subsidising the return for over six crore contributing subscribers, the EPFO must provide greater flexibility in the allocation of funds across asset classes. The EPF corpus — of about ?15 lakh crore — is sizeable enough to expand across asset classes and get the right trade off between risk and return.
The one-year return of the NPS even for government employees, who have the option now to invest up to 50% in equities, is about 400-440 basis points above the EPF’s. The exchange-traded funds purchased in the first two quarters of 2017 have been lucrative, according to the EPFO. Rather than bonds varnished with equity, the EPFO must invest in private equity, venture capital, even set up special situation funds that invest in distressed assets to establish claims on broader segments of the economy’s productive capacity while diversifying risk. A separate fund under the EPFO for contributions from individuals who voluntarily join the scheme would be to duplicate the NPS model, without its flexibility.
Courtesy - The Economic Times.
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