It’s time to rid the EPFO of investment opacity2 min read . Updated: 10 Sep 2020, 10:04 PM IST
The internal contradictions of this state-run manager of our retirement funds are bubbling up to the surface now, as seen in its split payout for the year. Our provident fund needs reform
The decision of India’s Employees’ Provident Fund Organization (EPFO) board to split its payout for 2019-20 into two parts—8.15% from its bond investments right now and 0.35% from its equity investments later this year—was unprecedented alright. But it was no big surprise, given the poor performance of its stock portfolio. Provident fund (PF) subscribers should not fret too much. Even if they must content themselves with just the main tranche, a rate of 8.15% is superior to anything a bank deposit could have offered in these times of low interest rates. In fact, some economists have argued that PF account holders are rewarded far too handsomely, distorting credit markets by getting in the way of efforts by the central bank to cheapen loans. It is an argument that holds some weight, and so the state-run manager of our retirement kitty has been generous. Fund management is not about generosity, however, and its deferral of the equity slice of its annual payout is yet another sign that it is woefully out of step with the times.
That one cannot be partially market-linked is something that this newspaper has flagged over the past few years, ever since the EPFO decided to open the door a crack to allow stock market investments. Today, 15% of its incremental inflows go into stocks through select exchange traded funds (ETFs), and equity investments make up just under 5% of its corpus of over ₹12 trillion. While the organization decided to start investing in shares back in 2015, it seems to have done nothing to account for how its equity returns would be reflected in a subscriber’s account statement. The only way to do this for mark-to-market holdings such as publicly-listed equity is to unitize these investments, the way mutual funds do. Even the National Pension System (NPS) does it. But how does one split a portion of the pool into units and not the rest? The EPFO went into loops trying to solve this unsolvable problem of keeping a part of the portfolio opaque while shining the light of transparency on another part, and then trying to offer a consolidated return. Ideally, both the debt and equity parts of its overall portfolio should reflect up-to-date market values, and a single return given. The NPS, which has performed better, could serve as a model for this.
More than two decades ago, India learnt a lesson at the cost of millions of retail investors by letting Unit Trust of India manage dark pools of public money and declare dividends that were out of whack with the actual market value of its assets. Such opaque pools of non-market linked public assets pose a systemic risk to an economy that hopes to be the world’s third-largest within a decade. A solution to our EPFO problem would need political will. Not only must we expose its corpus to third-party scrutiny, but also risk upsetting subscribers with a stiff dose of market reality. So far, our attempts to fix this comfort blanket for our salaried middle-class have evoked public uproars. In the years ahead, though, we may have no option but to reform the scheme to reflect the true value of its holdings. Until we do this, we will have the bizarre spectacle of a certain return being declared without any information on what this mega-fund’s equity operations yielded for subscribers. That’s a throwback to the 1970s’ way of doing things.