The pension fund body is unclear how it would credit gains made from equity exposure to its subscribers
EPFO subscribers were to get ETF units as well as the non-equity component in their accounts
Five years after it entered the equity market, the Employees’ Provident Fund Organisation (EPFO) is yet to iron out shortcomings, including a move to allocate units of Exchange Traded Fund (ETF) to its subscribers.
EPFO has been investing in the stock market since August 2015 via ETFs. So far it is unclear how it would credit gains made from its exposure to equities to subscribers during a partial or full withdrawal.
Since 2017, there has been talk on how EPFO subscribers will get to see ETF units as well as the non-equity component of their retirement corpus in their account. However, this is yet to become effective.
“The ETF unit allocation plan shall offer freedom to withdraw the non-equity component and keep the ETF units in their account even after retirement or in the case of early withdrawal," said a government official requesting anonymity.
“The initial plan was if a subscriber wishes to withdraw both equity and cash components, he or she will have to mention this in the withdrawal application. However, a final decision is yet to be taken," said the official.
The account of EPFO subscribers was supposed to have two components, one for debt investments and the fixed return it assures, and the second for the ETF units with an option to withdraw or keep it during partial or full claim settlements. “It’s still a work in progress," the official said.
The last time EPFO encashed some ETF was in 2017-18 when it redeemed ₹2,686 crore. In 2019-20, EPFO invested almost ₹31,000 crore in equity market. Every year, EPFO invests 15% of its accruals in equity and rest in debt investments.
“You cannot ignore equity as an asset class. However, it is very important how you do it and whether you mark it to market in terms of accounting and returns. May be EPFO can give options like National Pension System (NPS) to those who wish to invest more in the equity asset and a basic default threshold for all others," said Amit Gopal, India business leader-investments at Mercer.
So far, EPFO has invested ₹1.03 trillion in four ETFs and has a notional cumulative return of -8.3%. It’s return on investments in government-backed CPSE ETF has given it a -24.36% return and the Bharat 22 ETF has given a negative return of 20%, Mint reported on Sunday. This is likely to be discussed in EPFO’s board meeting on Wednesday.
Besides, the EPFO’s equity investments via ETFs suffer from narrow diversification and there is no option such as NPS to increase or decrease equity exposure. The narrow diversification has resulted in low or negative returns for this asset class and without a clear redemption plan, the equity exposure is not playing a role in its annual interest rate calculations.
“ETF as a concept is not bad for a pension fund such as EPFO. However, this Nifty 50 centricity needs to change. Maybe they should broad-base it and look at Nifty 100 and Nifty 500 indices for diversification and a fair representation of the economy," said Shyam Sekhar, a financial planner and founder ithought, a financial consulting and advisory firm.
“CPSE ETF or Bharat 22 ETF may not be good vehicles for a pension fund for the way it is managed. There is structural problem in them…and it was not thought through enough to create value for its shareholders while achieving some disinvestment targets," said Sekhar.