Difficult regulatory environment a hurdle for PF Trusts
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Good causes need champions and being a champion for a good cause means poor economics. Like Freddie Mercury said it involves ‘paying dues, doing sentences, getting your share of sand kicked in the face, having committed no crime’. So it is that the cause of the exempt provident fund languishes.
If you are an employer, you can remit provident fund deductions to the Employees’ Provident Fund organisation (EPFO). Alternatively, you could set up a Trust, contribute to it and let the Trust and its trustees run the provident fund for your employees. The functioning of the Trust is under the regulatory oversight of the EPFO. Maintaining a Trust comes with some imperatives and many responsibilities. Apart from the obvious (timely contributions for all employees), a primary responsibility of the employer is to ensure that the employee’s benefits are similar or more than those if the funds were with the EPFO. This ensures that the employer pays the same contributions as the EPFO scheme. It also requires that the Trust match or better the investment returns of the EPFO with potential financial risk to the employer. If the Trust is unable to match the interest rate on EPF, the employer is required to pay the shortfall through funding of additional sums of money. Further, administration of the provident fund programme, employee engagement such as transactions, and query resolution is the responsibility of the trustees and the employer. The employer pays the EPFO a fee (curiously termed ‘inspection fee’) of 0.18% of wages. Contrast that with the fee of 0.65% of wages if the fund is with the EPFO.
Such Trusts have tended to deliver value to employers and employees alike, thanks to their superior long-term, cost-to-service ratio—relative to the EPFO. A well run provident fund Trust delivers enhanced services to employees in the form of prompt payments of provident fund benefits, query resolution whilst providing the employer, greater control over compliances. Overall, these improve the employee experience in benefits and pensions. Trusts have used technology to improve scale and services for many years now. For instance, large employee Trusts have provided online access to provident fund balances for a while now. This has been implemented by the EPFO only recently. Such Trusts leverage the presence of specialist HR outsourcing firms in the pension administration space to facilitate delivery and improve employee experience. The advent of technology at the EPFO has not diminished the value proposition of the Trust format, given the inept handling of the migration by the EPFO. Around 1,500 employers across the country run such Trusts. One would expect many more considering the value they deliver but I attribute this stunted number to a combination of hostile regulatory environment and accounting standards.
The difficult regulatory environment stems from the dual and conflicting role of the EPFO. As both a regulator and administrator, exempt provident funds are often viewed as competition to the EPFO. This results in apathy in developmental regulation and, often, hostility in regulatory oversight. Employers that run such Trusts bear the brunt. Regulator audits and inspections tend to be tedious. Sometimes one finds that the staff conducting such audits is untrained. The EPFO has often been accused of lacking oversight. It is my belief that their oversight is unfocussed and misses the objective behind the functioning of such Trusts—employee experience. This hostile environment also manifests itself in the form of tacit reluctance to permit the setting up of new Trusts. Employers that seek such approvals have to wait for years to receive them. The Central Board of Direct Taxes (CBDT) that announced a deadline for obtaining such approvals (termed exemptions in pension parlance) had to extend the deadline for around 7 successive years since the pace of grant of the exemptions is abysmally slow.
Accounting standards that classify such Trusts as defined benefit programmes due to the interest rate guarantees have also contributed to the decline in the number of Trusts. Empirically, while the long-term costs of running such Trusts have resulted in savings to employers (versus those of EPFO administered plans), the actuarial impact can queer the pitch.
Such external negatives are a pity since the Trust, while fulfilling the objective of an efficient pension plan, can bring significant relief to the EPFO’s workload. For an organization that is yet to come to terms with the technology that it has implemented and which faces competition from programmes such as the National Pension System (NPS), exempt Trusts for large employers can mean the ability to be a genuine regulator or supervisor instead of the current conflicting role. However, this will require a champion with a vision—one that is sorely lacking for the moment. I read with extreme disappointment the report of the Standing Committee on Labour that went into the performance of exempted Trusts. Instead of opening up the debate on the role of such Trusts in developing pensions, the focus seemed to be solely on the EPFO’s inadequacy in regulating such Trusts.
For nay-sayers of the exempt provident funds, the point of inflexion may still be ahead. At root is the change to the investment guidelines governing provident fund. With equities, an inherent part of the asset allocation of the EPF, the days of guaranteed returns may be numbered. Bereft of investment risks, employers may find the exempt Trust a champion again.
Amit Gopal is senior vice-president, India Life Capital Pvt. Ltd