High impact labour reform needed

Aug 04 2014, 00:56 IST
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SummaryThe EPFO should be punished, rather than rewarded, for its four sins. This will raise formal employment.

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 lamp—the Employees Provident Fund Organisation (EPFO), set up in 1952. The EPFO should be punished for its four sins of cost (it is the world’s 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 governance—allocation of decision rights—of 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? Let’s look at the four sins—costs, operational goofiness, fiscal imprudence and governance—and possible solutions.

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