Column: Put PF pension money in markets

Written by Samirendra Chatterjee | Updated: Nov 5 2013, 11:10am hrs
The Employee Provident Fund Organisation (EPFO) is one of the largest social security funds in the world. At the last count, its corpus was at about R5 lakh crore. In addition, about 3,000 exempted funds have a corpus of about R2 lakh crore. The exempted funds are those of employees of certain employer organisations, who form a trust and invest the contributions of employees through their own trusts, instead of depositing the funds in EPFO. The exemptions are granted by the EPFO subject to certain conditions being fulfilled, and the employee unions and employer agreeing to such an arrangement. However, the exempted establishments have to follow the same investment pattern as the EPFO.

In view of the large corpus (of about R7 lakh crore), several attempts were made in the past to persuade the organisation to invest in capital market. This attempt was particularly strong during 2010-12 period, when I was the Central Provident Fund Commissioner. We had strongly resisted the move, and finally the central board of trustees had to demand that the finance ministry should, in such a case, guarantee the principal and a minimum rate of return. After this, the persuasion was dropped.

How does the EPFO invest, then As per the present pattern, 25% of the corpus is invested in central government securities, 15% in state government and government-guaranteed PSUs securities, 30% in public sector bonds with above certain minimum ratings, FDs, etc. The remaining 30% can be invested in any of the above. At present, some private sector companies have also been included, subject to some stringent conditions. This ensures that the returns every year are actuals received (interests, coupon rates, etc.) and credited to the interest account. The capital remains intact, which is ensured, as the securities and bonds are held to maturity and there is no chance of mark-to-market gains/losses.

There are reports that the government is now thinking of giving tax breaks to mutual funds, to attract household savings and pension funds. The proposal for household savings will be based on voluntary investment by individuals, and tax-breaks are one of the many important factors considered in making investment decisions. This is perhaps even more necessary, as less than 2% of household savings are invested in the capital market, mainly because ordinary people perceive return of capital to be more important than return on capital. The stock market scams and lack of immediate retribution, deter them. As far as pension funds like EPFO are concerned, these are already exempted from taxes, and, therefore it will make no difference to these organisations (EPFO and exempted ones). Even the tax-free bonds floated by PSUs are not attractive for such organisations, who do not invest in them. So it is

not the tax-breaks, it is the risks involved that deter the pension funds from investing in the

capital market.

Another fear which always lurks is the extraneous pressures that will be brought on the organisations, to invest in dubious equities/debt instruments, in case it is opened up to the capital market in general. We cannot surely forget what happened to UTI sometime ago!

What is the solution, then The pension fund of the EPFO is a corpus from which only a Defined Pension is paid, and there is an annual accretion to the current corpus of about R1.5 lakh crore. This does not have to be credited to individual accounts, and remains as a pooled fund. The interest earned on this pooled fund is also added to it each year. The Defined Pensions are paid to the pensioners every month from this fund.

A part of this corpus can be invested in the capital market, with some pre-specified conditions. A modest beginning can be made with a couple of thousand crores, and the results evaluated after about a year or so. It would be a pilot project, and based on the outcome, further decisions could be taken on whether to expand the corpus to be invested in the capital market.

However, it is worthwhile to note that the Sensex after reaching a high in January, 2008, had always hovered lower, resulting in capital losses. The average dividend yield is only around 1% in the Sensex stocks. Only now, after almost six years, it has reached level similar to the 2008-high. Of course, how long will the high continue is anybodys guess! As Keynes had famously said, In the long run we are all dead.

This new investment in equities can be started straight away, if a decision is taken in this regard, as the EPFO and the exempted establishments enjoy tax concessions already, and investments can be made through the 4 fund managers, as is being done now, and there is no need for further intermediation through mutual funds. A relaxation in Security Transaction Tax (STT) could be given. However, the amount involved would not be significant. Surely, such a bold decision can be taken without much risk involved!

It would be a win-win situation for the protagonists of the capital market, as well as the conservatives (risk-averse persons), as it would not involve the individual PF funds of the workers, whose PF accumulations would be safe along with interest accumulations each year, as also their Defined Pensions, as and when they become due.

The author is a former Central Provident Fund Commissioner