High impact labour reform needed

Written by Manish Sabharwal | Updated: Aug 4 2014, 06:26am hrs
In 1950, Jawaharlal Nehru viewed the creation of institutions as lighting of lamps because vast and great parts of India are still in darkness. I am sure he would be greatly pained by the darkness being spread by one such lampthe Employees Provident Fund Organisation (EPFO), set up in 1952. The EPFO should be punished for its four sins of cost (it is the worlds most expensive government securities mutual fund and charges 100% more than its costs as expenses), operational goofiness (50 million out of their 100 million accounts are orphans), fiscal imprudence (they have an unfilled hole of more than R50,000 crore in their pension scheme) and governance (capture by vested interests).

Yet EPFO is celebrating an expansion of its kingdom; all employees with a salary of up to R15,000 will now be covered, up from all employees with salaries of R6,500 till recently. To be fair, this was proposed by the earlier government and rejecting it had bad political optics. But this change should have been accompanied by radical changes to a geriatric programme that is largely a child of the 1929 recommendation of the Royal Commission of Labour and model rules circulated in 1945.

Unfortunately, this expansion is soon going to be followed by expanding the kingdom of EPFO to employers with more than 10 employers rather than the current 20 employers. This reform may be the right thing to do but this piecemeal approach should be stalled till a more integrated and comprehensive plan is put in place. This plan should answer many questions. Why is EPFO being rewarded instead of being punished Why is the expansion of coverage not being accompanied by an expansion of competition Why have 50 million employees forgotten more than R40,000 crore Why does EPFO generate a surplus of R2,000 crore on expenses every year Why is the governanceallocation of decision rightsof EPFO not being rebooted and made more representative of stakeholders Why have many IT projects of EPFO failed Do the savings rates of low wage employees allow for a 24% EPFO salary confiscation If the Employee Pension Scheme (EPS) is such a great programme, why is it continuously reducing benefits Does the new R1,000 minimum pension have any actuarial sustainability or is it the last nail in the coffin of a patient who is already dead Lets look at the four sinscosts, operational goofiness, fiscal imprudence and governanceand possible solutions.

Costs: EPFOs charges of 440 basis points make it the worlds most expensive government securities mutual fund. Fascinatingly, these charges generate a surplus for them of more than R2,000 crore. There are two solutions to this sin. First, EPFO must cut their charges to unexempt employers by 50% and exempt employers by 75%. Second, all employees should have a choice to pay their contribution to EPFO or to their individual accounts under the National Pension System.

Operational goofiness: EPFOs 50 million dormant accounts represent money left behind by employees frustrated by their inability to access or transfer their money because of outdated workflows, lack of double-entry bookkeeping, poor IT plumbing, poor cadre management with too many people at the bottom, and poor performance management that leads to low accountability. A birth defect in the programme is linking benefits to the employer rather than employees. Of course, a permanent employee ID is overdue. But the only sustainable solution to this sin is to separate the regulatory and administrative role of EPFO and subject the administrative role to free competition from NPS, NSDL, etc.

Fiscal imprudence: The last actuarial report available under Right to Information requests for EPS is dated but horrible; the hole is more than R50,000 crore. Despite a commitment to the Supreme Court that the scheme was sustainable, EPFO has made a number of technical adjustments like factor adjustments pension, deletion of return of capital and commutation, factor adjustment for resignation payments, tweaked ceilings for contributions and benefits, etc, which essentially amount to reduction in benefits to employees. EPS should be closed to new employees and the employer contribution should be moved back to a defined contribution account (either EPFO or NPS) based on employee choice.

Governance: The current governance of EPFO has failed to make fair, transparent and effective trade-offs between various stakeholders. The board of EPFO needs to be radically reconstituted with equal representation from employees, employers, policymakers and pension professionals. All members should be restricted to only one term of five years. The objectives of the board should include service, costs and investment performance. EPFO is an employer pension programme but has suffered because of attempts to make it broad-based social security. India needs broad-based social security but 7 lakh out of the 6.3 crore enterprises cannot pay for it; taxpayers must.

EPFO, like all monopolies, does not have clients but has hostages. Of course, EPFO has been confused by multiple objectivesSocrates said a slave who has three masters is free. But EPFO has had enough time to heal itself; its time to punish rather than reward it for its treatment of Indias workers. This high impact labour law reform will raise formal employment because today employees detest EPFO more than employers.

The author is chairman, Teamlease Services