The EPFO also proposed a change in rule that will allow it to trade in bonds to reap the benefits of capital gains when the market is booming, instead of the practice of holding them till maturity. The proposal has been referred to the EPFOs finance, investment and audit committee for further discussion.
Both of these initiatives, coupled with new investment norms that allow EPFO to invest up to 55% of its incremental funds in corporate bonds and 5% in debt mutual funds, may increase liquidity and add depth to the bond market in coming years.
Labour minister Oscar Fernandes, who chaired the central board of trustees of the EPFO, said he was going to recommend to the government a 8.75% interest on EPF contributions during 2013-14 as that was the maximum the fund could offer and still end up with a small surplus of R43.1 crore. We dont have provisions for offering more than that (8.75%), he said when asked why the EPFO couldnt offer 9% demanded by the trade unions.
During 2013-14, the EPFOs interest income is estimated at R25,048.55 crore while the interest outgo is pegged at R25,005.41 crore after paying 8.75% interest, leaving a surplus of about R43 crore. Our suspense account is in surplus now and we have not used any amount from inoperative account, chief provident fund commissioner KK Jalan said.
Asked how the EPFO could increase its returns in coming days, Jalan said one option was to withdraw a part of the amount parked in SDS that earns 8-8.5% interest, and invest them in bonds that yield higher returns.
A lump sum withdrawal from SDS may impinge on government finances but boost liquidity and depth of the bond market. Already, the labour ministry has notified a new investment rule that lets EPFO invest up to 55% of its incremental funds in corporate bonds and fixed deposits of both PSUs and private firms and another 5% in money market mutual funds.
While the four fund managers SBI, HSBC AMC, Reliance Capital AMC and ICICI Securities Primary Dealership have helped EPFO generate higher returns of 9.18-9.23% from government and corporate bonds since 2009. EPFOs legacy investment, especially in SDS and government bonds, caps its weighted average interest income at around 8.5-8.7%.
Fernandes has also proposed a new scheme that will enable EPFO subscribers to park 10% of their salary in the employees pension scheme, which will be used to finance a housing unit that will be provided to them after retirement. Though the scheme was not part of CBT agenda, Jalan said it would be taken up by the EPFO in due course.
Among other EPFO initiatives, Jalan said the CBT has approved a 20% hike in the benefits from employees deposit-linked insurance scheme. This will increase the maximum insurance benefit from R1.3 lakh to R1.56 lakh to the nominees in case of a subscribers death.
The EPFO is also in the process of appointing a consultant who will help in reappointing fund managers and tracking their performance as the present adviser Crisil's tenure is to end soon.