The violence in Bangalore and the welcome roll-back of the February 10 notification restricting employer balance withdrawal is an opportunity to think harder about the existing birth-defects of the Provident Fund. Can workers live on half their salary and be forced to save 45% of their salary when their saving rate below incomes of R15,000 per month is close to zero? Doesn’t salary belong to workers and shouldn’t workers decide who handles their money? Are Provident Fund trustees regulators, policy-makers or service-providers? Should Provident Fund be tax-free at all stages (contribution, accumulation and payout) for high-wage workers voluntarily participating in the scheme? Why does the Provident Fund department have more than 50 million dormant accounts which represents workers’ money left behind?

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The answers to these questions are important; we would like to make the case that the recurring incidence of worker dissatisfaction around Provident Fund is not worker myopia—their inability to calculate long-term self-interest by not saving—but represents years of cumulative resentment against an organisation that is incompetent, inefficient, ineffective and, at the bottom of the pyramid, often corrupt. This discontent will only grow larger as India’s formal sector increases but counter-intuitively EPFO is also one of the biggest retardants of formal employment—100% of net job creation since 1991 has happened informally—because of its perception as having poor value for money. The time for tinkering is over; we need a radical reboot of our employee benefits regime, that recognises changes in the world of work and we would like to make the case for five important changes.

Governance

The Board of Trustees of the Employee Provident Fund is a geriatric ward that is not representative of today’s Provident Fund Payers. If we applied the “prudent man” role of ERISA (the Employee Retirement and Income Security Act of the US) then the current trustees of EPFO would be guilty of gross negligence because they have they not considered IT systems or double-entry bookkeeping a priority, do not consider the millions of orphan accounts as a personal failure, and have allowed galloping expenses. The reconstituted Board needs to be smaller, needs to have term and age limits for membership, and its mandate needs to be restricted to managing the money and providing service. The policy functions of EPFO and trustees should be shifted to the ministry of labour/finance and its regulatory functions should be taken over by PFRDA.

Competition

The Provident Fund is currently the most expensive government securities mutual fund in the world in terms of administrative fees. The poor service and lack of operational excellence reflects in their millions of orphan accounts with more than R30,000 crore in unclaimed balances. The Provident Fund Organization’s monopoly has made it fat and inefficient; workers need more options to manage their funds and provide services. Even if we don’t want private sector competition in the first phase, we must create the option for employees to pay their monthly contributions into the National Pension Scheme (NPS).

Linking benefits to employees

Employment has shifted from being a lifetime contract to a taxicab relationship and benefits need to be linked to employees rather than the employer so that these remain portable. An average 20-year-old is expected to have 5 jobs before she is 50. The JAM Trinity (Jan Dhan, Aadhaar and Mobile) is important new infrastructure that allows linking of employee benefits directly to the employee. To avoid employers playing around with Provident Fund monies and creating transfer and orphan issues, employers should be required to pay monthly contribution into an account linked to the Aadhaar number of every employee.

Design

Currently almost all of the Employer Provident Fund contribution is made into a poorly-designed scheme called Employee Pension Scheme (EPS) that is technically bankrupt but being made solvent by continuously reducing benefits. EPFO only applies to employee with salaries upto R15,000 but can voluntarily be joined by employees with higher wages and is completely tax-free at all three stages; contribution, accumulation, and payout. We suggest three changes; a) Employees should have an option to opt out of EPS because it is not the superior scheme that EPFO told the Supreme court it was, b) any employee who started with a salary of more than R15,000 per month income should be subject to tax at the time of withdrawal for the period their income was more than the threshold, c) the mandatory annuitisation of NPS should be replaced by a payment in 10 equal instalments (with interest being earned on the unpaid amount) and this should be replicated by EPFO.

Unrealistic 24% contribution

The current regime does not recognise that mandatory employee benefits in a Cost-to-Company world of salaries reduce take-home salary rather than increase gross salary. The new regime must recognise that low-wage employees, by definition, cannot live on half their salary and cannot be forced to save more than their savings. We must make the monthly employee contribution (12%) voluntary while continuing the employer contribution to Provident Fund.

The Provident Fund organisation has frittered away its original design genius, misunderstood the mood of workers, underestimated the pain it causes to employers, and failed to create sustainable governance. It is time for change.

The writers are with Teamlease Services.