Column PF’s bittersweet month

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: EPS, EDLI, etc by employees (backpack benefits) rather than employer greatly increases portability.

The fund manager triumph notwithstanding, EPFO’s future may be doomed by the decision to increase coverage to organisations with more than 10 employees. Samuel Johnson once described second marriage as the triumph of hope over experience. While second marriages have limited downside, this toxic decision flies in the face of experience since EPFO covers less than half of its current mandate and will: a) amplify unorganised employment, and b) explode the contingent pension liability of the government.

This decision represents the death knell for attempts to increase organised employment. EPFO participation requires employees to save 24% of their salary while the IIMS Dataworks annual survey of the Invest India foundation points out that 25% of those employed in 10-19 employee firms save only 9%. Forced savings of this magnitude at lower salary levels are impossible and force informalisation. This decision represents a fundamental misunderstanding by policy makers of the Cost-to-Company (CTC) world; benefits come out of salary and are not over and above it. I guess this arises from the way government bureaucrats are paid where benefits are not monetised. I’m not even factoring in questions about EPFO’s ability to handle higher volumes without sinking already questionable service. Nobody should be surprised if unorganised employment accelerates.

Not many Provident Fund members realise that 8.33% of their salary is diverted to a defined benefit plan called the Employee Pension Scheme. The last actuarial valuation four years ago calculated the scheme deficit at Rs 22,000 crore. This liability was increasing rapidly with nothing done; it will now exponentially increase with the new members. I bet this hole will be larger than the erstwhile UTI unless benefits are reduced.