Editorial: Stop the EPFO advantage

Sep 06 2013, 05:17 IST
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SummaryIt offers low returns, and is a financial time bomb

Now that the government has got the Pension Fund Regulatory and Development Authority (PFRDA) Bill through the Lok Sabha, and the Rajya Sabha is likely to pass it soon, it is time to look at ending the monopoly of the inefficient Employees Provident Fund Organisation (EPFO) over the hard-earned savings of crores of Indians. It also needs to do this to save its own finances since, in its current form, the EPFO is a ticking time bomb in fiscal terms.

The EPFO is bad news for a variety of reasons. For one, as our page one graphic shows, it offers much lower returns than the New Pension Scheme started during the NDA years. Two, the charges of the EPFO are significantly higher than those of the NPS—indeed, the EPFO is probably the world’s most expensive pension scheme. Third, even the returns it offers are exaggerated since around R23,000 crore of subscribers funds are locked away in dormant accounts—this means subscribers have not been given back large amounts of their life savings. Four, the government distorts returns by offering EPFO investors tax free status on their returns while charging taxes for NPS returns—it also makes annual contributions to the EPFO while it doesn’t do the same for the NPS.

The biggest killer from the point of view of the government, and contributors who are in danger of losing their pensions, is the ever-widening hole in the EPFO’s pension scheme, the Employees’ Pension Scheme (EPS). While the EPS guarantees a life-long pension equal to half the last salary drawn, subject to a certain ceiling, the project has become unviable and data available till just FY10 shows a R54,000 crore hole—the scheme was a viable one when it was conceived since returns were higher, but that is no longer true. Even this R54,000 crore number could be a gross under-estimate since it is based on a sample which is not representative of EPFO’s subscriber base—it cannot be, since EPFO does not know the age profile of its clients. It is because of this ticking time bomb that, for new employees, the government decided to shift to the NPS where pension payments are linked to the returns fund managers make on monthly savings. It is time to do the same for private individuals who will also benefit from superior returns.

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