New Delhi/Mumbai: The estimated 40 million workers who have kept their retirement money with the state-run Employees’ Provident Fund Organisation (EPFO) will receive a return of 8.5% in 2009-10, thanks to new private sector fund managers who injected a dose of competition and a rise in bond prices after October.
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The returns that EPFO pays each year is closely watched by the country’s labour unions which often demand higher returns than those the fund actually earns from its investments.
According to a senior official in the labour ministry, who did not want to be identified as the 42 EPFO trustees have not yet formally cleared the decision to peg the payout at 8.5%, the introduction of three private sector fund managers in September to supplement public sector State Bank of India (SBI) provided the fillip for better returns.
ICICI Prudential Asset Management Co. Ltd, HSBC Asset Management Co. Ltd and Reliance Asset Management Co. Ltd were given the mandate to manage the savings flowing into EPFO. The four managers, appointed by EPFO, earned returns of between 8.68% and 9.14% in 2008-09.
An interest rate of 8.5% leaves EPFO with a surplus of Rs6.40 crore. EPFO’s trustees are expected to meet soon after a labour minister is appointed, when details of the surplus would be presented.
Nagpal, however, felt EPFO could increase the interest payment by another percentage point to 9.5% by using reserves to pay out more than has been earned, as it has done in recent years.
Three trustees form a sub-committee to find out a feasible interest rate. In 2007-08, too, EPFO paid out 8.5%, but it had to dip into its reserves to do so. Former central provident fund commissioner A.Viswanathan said the organization manages around Rs3 trillion. The funds are invested largely in Unions and state government securities and public sector bonds. The biggest portion is put away in a Union government deposit scheme, Special Deposit Scheme (SDS), which pays a fixed 8% a year. The Centre stopped accepting fresh deposits since 2004.
The three new private sector fund managers were asked to manage pension funds along with SBI after some of the trustees felt the bank’s monopoly on asset management led to lacklustre results.
An interest rate of 8.5% leaves EPFO with a surplus of Rs6.40 crore. Sandeep Bhatnagar / Mint
Following the introduction of competition, SBI has outperformed its private sector rivals in terms of returns between 17 September and 31 March. SBI’s fund management got returns of 9.14%, compared with 8.84% earned by nearest competitor ICICI Bank. Reliance generated the lowest returns of 8.68%.
One of SBI’s competitors said the new entrants had to grapple with a challenging operating environment.
“We had to invest by the guidelines set by the EPFO— 25% in G-secs (government securities), 15% in state government bonds, 30% in public sector unit bonds and so on, ” said a fund manager from the one of the three private sector asset managers, who didn’t want to be quoted since EPFO doesn’t permit him. “We have to necessarily operate within this framework and depending on your views (of how interest rates will behave), buy the right paper at the right time.”
“One major problem working with EPFO is that you are never sure when the inflow is coming in. Typically it arrives in the second half of the month, but these are just the fresh inflows. You never know when the old stock (money already invested) will mature and that money will be added to your portfolio,” the fund manager added.
An independent bond market expert felt 2008 provided a benign environment to manage investment in bonds.
The second half of the last fiscal “was the easiest period for a person managing fixed income funds,” said Alok Singh, head of fixed income and structured products, at Fortis Investment Management India Pvt. Ltd. “It was a one-sided market and things were predictable. Given the financial state, you knew that the RBI (Reserve Bank of India) was going to cut rates.”
RBI has cut the rate at which it pumps money into the system from 9% to 4.75% in six stages since October.