After raising interest on provident fund to 8.75% for 2013-14 from 8.5% last year, the Employees Provident Fund Organisation (EPFO) is considering a gradual withdrawal of its Rs 54,000 crore parked in the government’s special deposit schemes (SDS) and investing that in high-yielding bonds to sustain higher returns in the coming years.
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 EPFO’s 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 don’t have provisions for offering more than that (8.75%),” he said when asked why the EPFO couldn’t offer 9% demanded by the trade unions.
During 2013-14, the EPFO’s 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%