New Delhi: The employees’ provident fund, or EPF, a savings plan under which employees contribute 12% of their basic salary and the employer contributes an equal amount to a government-administered fund that is paid out either on retirement or disability of an employee, is restricted to establishments with 20 employees and more. Recently, the Union government proposed that the benefits of EPF be extended even to establishments employing 10 persons, and to all industries in the country. According to the National Sample Survey Organisation, a government body that conducts social and economic surveys, 44.35 million enterprises employ 79.71 million workers in the so-called unorganized sector. In its existing form, as of March 2006, the EPF scheme extends to 441,000 establishments.
Mint spoke recently to A. Viswanathan, central provident fund commissioner of the Employees’ Provident Fund Organisation, or EPFO, on this and a range of issues associated with the administration of the fund. Edited excerpts:
Where does the current decision to expand EPF coverage to firms with 10 or more employees flow from?
It (the decision) is not a sudden one. It has been on the cards for a long time.
The second National Commission on Labour (2004) said we have to give security to every individual. How do you do it? Instead of expanding coverage to firms with 10 or more, or five or more and so on, they asked us to extend social security to everyone. Today, luckily we are in a stage called demographic boom. But along with a boom we have a huge lurking liability. In 30-40 years all these youngsters will become old. What is the income support they are going to have? The family structure is not going to stay like this. Family support which has been the backbone of Indian society for so long will break up. Due to urbanization there is strain on the family structure. EPF has to expand its coverage, otherwise society will have a problem.
Comfort zone: Viswanathan makes a case for EPF, saying that even at an interest rate of 8.5%, the contribution made to the fund pays quite well compared to, say, savings in banks since it is tax-free and is assured money which translates to assured security. Photograph: Harikrishna Katragadda / Mint
The recommendation (to expand coverage) was made six years ago. EPFO itself had made this recommendation in 2003. The same board had also approved this. But it came with a rider to ensure no difficulties are caused to the workers or management, because the smaller the establishment, you have to take a lot of care to reach them for the purpose of coverage, registration, enrolment and service delivery. How do you do that? When this recommendation was sent to the government, they decided that the time was not right. At this time, the unorganized sector workers’ Bill has come. The Bill takes care of establishments with up to nine workers. So, establishments with 10-19 workers will be left out. So, we thought we must cover this so that the entire population comes under a certain sustainable social security model.
A number of employers were opposing this move. Would you like to elaborate?
No one opposed it as such. Employers’ representatives were also of the view that social security must be provided to all. Their fear is, smaller the establishment, the employer becomes the accountant, salesman, he is everything. They were averse to adding one more administrative burden. Their concern was how to make things simpler, make it Web-enabled or something. It was more to do with processes, the process of registration, giving benefits, etc.
Will the interest rate (on EPF) be reduced to 8.25%?
The board has not taken any such decision; 8.5% can be easily sustained. Estimates are made at the start of the year based on certain assumptions. We always make a very conservative estimate on the interest rate so that we don’t make any overdrawal. We would like to sustain 8.5%. In the year 2008-09, I have no means of increasing the interest rate. Maybe at the end of this year, I would be able to say. There was a request in the CBT (central board of trustees) that the board members must meet the Prime Minister for enhancing the interest rate and to express their views on the same.
You might be able to increase rates after March 2009? Even at 8.5%, you seem to have a shortfall of about Rs139 crore.
A clear picture will emerge only later. Maybe there will be no shortfall, because, interest rates have gone up now. All that has to be factored in. As per a calculation I made a couple of months ago, I might be able to maintain 8.4% without any shortfall. We might even get 1% extra. We normally fix the interest rate well before the beginning of the financial year so that any person leaving in the middle will also get a proper rate of interest. We have not been able to do it this year or the previous year also. But when we do the arithmetic later, maybe it will be possible to give a better rate. We may be able to give 8.5% without shortfall.
So 8.5% is a good rate of interest in your opinion?
(Laughs) Yes, I am giving 8.5%, which is tax-free. Secondly, in case the employer does not pay, I am underwriting the money. The big picture is pension. To get some assured money is the greatest security.
If a person is getting more by way of interest money in banks, why would they want to continue contributing to EPF?
Two reasons. First is that contribution made to EPF is completely tax-exempt. If you put your money in a bank deposit, you are going to be taxed. Second, today the bank rate is high, but two-three years ago what was happening? People were withdrawing because bank rates were low. In case you are making your own investments, there is an element of risk and administrative cost. EPF can spread its risks. So, there are many good reasons why EPF is good.
Are you thinking of changing the investment mix of your fund since given the current inflation trend, returns are not that great?
We are making investments as per the mandate given by the board and investment pattern approved by the government. It will not allow me to take any risk. It is their call and wisdom. The board has decided that most money will be in bonds, including those issued by the private sector. The board has refrained from investing in equity.
This is an election year, any pressures to increase interest rate?
No, nothing of that sort. Even if the board decides to give 15%, the government will act as a check as it is mandated to ensure that there is no overdrawal.
There was a demand to set up an EPF-like fund for enabling the Unorganized Sector Workers’ Social Security Bill. But the government rejected it. Would you like to comment?
EPF was designed keeping in mind people are going to stay in one job all their life. That they were all stable persons. What you call permanent employees. But the world has changed. Labour practices have changed. We have to change along with times but we have not done it in a very efficient manner. Until we do that, keeping a track of a large number of people is creating tremendous pressure on us.
Is the pension fund slowly collapsing? What is being done about it?
Yes, pension fund is under certain strain. If the fund is closed today, then we will have to keep paying out current members until they die. So, actuaries are saying that in 60 years, if we close the fund now, we will have a shortfall of Rs22,000 crore. The crisis is not immediate. We have already initiated certain measures to reduce the strain, and we will continue to do it. Already, a panel set up by the labour ministry is reviewing this whole scheme to suggest measures to improve it.