The Employees' Provident Fund Organisation (EPFO) is planning something big for its subscribers. A month ago, when the Sensex was busy breaking records, news reports mentioned that the government was mulling over increasing the equity investment limit for the retirement fund body from the current 15 per cent to maximise returns. Given that the EPFO's annual incremental corpus is pegged at over Rs 1.2 lakh crore and has total assets under management worth Rs 11 trillion, we're talking about a massive equity allocation. It appears that even the recent market correction has not thwarted plans.
According to Mint, the EPFO is now considering allowing employees with higher salaries to route 25 per cent of their PF contribution into stocks, while retaining the 15 per cent cap for low-income employees. "We have discussed the proposal a couple of times in recent months. In the next finance and investment advisory committee meeting, the issue will be taken up again," said Prabhakar Banasure, a member of the committee, adding, "The choice is a logical requirement in investment decisions."
Interestingly, the FIAC meeting was initially scheduled for January-end but was reportedly postponed till after the Budget day in anticipation of Finance Minister Arun Jaitley making a similar announcement. If this proposal is passed, it will be the first time the body will depart from its one-size-fits-all policy for investing retirement savings of its subscribers, who put in 12 per cent of their basic salary as a mandatory EPF contribution every month, with a matching 12 per cent contributed by employers.
According to official estimates, 75 per cent of the 5 crore EPFO members earn up to Rs 15,000 a month. But the bulk of its annual corpus comes from the remaining 25 per cent of members, and it is this better-earning segment that wants better returns. Sources told Mint that the "differential equity treatment proposal" was floated since not all EPFO subscribers are familiar with the stock market and not all can handle the risk involved. "The low-income employees may continue to invest 15% in stocks and the rest in debt and continue to get a stable assured return without taking a risk. With time, EPFO needs to evolve as an asset manager," added the source.
Though the government had allowed bodies like the EPFO to invest in the equity market in 2008, it was only in April 2015 that it tweaked rules and set the minimum limit for equity investment at 5 per cent. As of January 2018, EPFO had an equity exposure of Rs 44,000 crore, up from Rs 14,982 crore or 10 per cent of its investible amount in 2016-17. This, by the way, might have made it possible for the body to keep interest rate unchanged at 8.65 per cent at its upcoming trustees meet on February 21. The past few years have seen the interest rate on EPF headed downwards, from 8.8 per cent in 2015-16 to 8.65 per cent in the following fiscal, a four-year low. Sources in the know say that having sold exchange traded funds worth Rs 2,886 crore, the body won't need to cut rates further for this financial year.
But despite gradually upping the equity exposure, the retirement fund body continues to park a whopping 85 per cent is parked in debt market instruments like corporate bonds, government securities, etc. Over the past couple of years, while return on equity has exceeded 13.5 per cent - some even quote 16 per cent - that on debt is a mere 8 per cent, so it makes sense to invest a bigger chunk in the market. Pension funds across the world reportedly invest up to 40 per cent in equity as it is one of the best ways to stay ahead of inflation.
It's high time that EPFO, too, started thinking as aggressively, at least for a chunk of its members. If approved, the move will also help the EPFO to better compete with the National Pension System, which allows subscribers to invest up to 50 per cent of their savings in equities.
With PTI inputs
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