New Delhi: The Employees’ Provident Fund Organisation (EPFO), which oversees the retirement savings of close to 40 million Indian workers, expects to appoint three new fund managers by March as part of an effort to end State Bank of India (SBI) monopoly over the job.
EPFO, which was to have taken this decision by May, is also keen to have the state-owned bank compete for the slot as it expects private sector funds will be keen to vie for the right to manage the money.
With more than Rs2 trillion under three schemes, EPFO has a huge investable fund. It is overseen by a board of trustees that has been struggling to reverse a consistent drop in returns.
“At the moment, the board is open to allowing private sector fund managers to bid for a piece of the pie. We should be able to finalize this at the end of this year,” said A. Viswanathan, the central provident fund commissioner. He confirmed that SBI would probably not be one of the three fund managers by default, but would have to bid for the job.
The issue will be debated by the trustees on 23 July, though a series of meetings—held throughout this year—have so far failed to decide even the annual rate of interest for 2006-07. EPFO’s funds are invested according to rigid guidelines that currently rule out investment in equities.
“It makes sense. They (private fund managers) would still make some money and simultaneously develop their credentials,” predicts Sanjay Aggarwal, national industry director at audit firm KPMG.
Private sector players were kept out of the government’s recent move to activate a new pension system for its employees, though the original aim was to allow private sector players as PF managers.
But EPFO has many worries other than fund management.
Data for the last three years (2003-06) shows that when they retire, EPFO subscribers typically have no more than Rs30,000 saved up per person, making up the case for reforms in the system. “It amounts to almost nothing,” admits Viswanathan. “People treat their savings with us as if they were in a bank account. Painless withdrawals encourage this behaviour.” No interest or penalty is charged if subscribers withdraw PF savings before they retire. Since most early withdrawals are on account of marriage, education, health care or buying a house, EPFO has little choice, but to improve returns so that subscribers let their cash stay on board longer. All subscribers who retire now stand to lose out if the interest rate is not declared by the Centre. The delay is over a long-standing debate within the all-powerful board of trustees on whether EPFO should simply be treated like a savings account geared for retirement, or a social welfare scheme that can possibly provide subscribers an income during old age.
While the first option would allow the Centre to cut annual interest rates to 8% from 8.5%, it risks upsetting trade unions. If the second view wins, the part-privatization option must fly out of the window and the Centre says it will not be in a position to pay more than 8% to subscribers.
Even EPFO does not seem keen on having its corpus invested in equities, since the investment philosophy is geared towards instruments that provide a regular stream of income. Equities need active management to provide gains, which goes against the investment philosophy, said Viswanathan. “We don’t want to pass on the risk (by investing in equity) to the participants.”
This is also the view of several unions on board, such as the All India Trade Union Congress. “The question of private fund managers does not arise,” said its president Sanjeeva Reddy. “Employees must have the right to decide how their money is used, if they want to hire professionals to invest their money, the trustees,employees and employers should agree to do so, not just the government.”