Despite his recent bail, Ramalinga Raju of Satyam has learnt the hard way that those who ride tigers end up inside them. But the hole he created?about Rs 10,000 crore?is small relative to the Rs 50,000 crore deficit in the Employee Pension Scheme (EPS) created by the trustees of the Employees Provident Fund Organisation (EPFO). If the trustees are not willing to take responsibility for this hole they must be held liable or made to resign so that we fix the birth defect in the governance structure at EPFO, which allowed the introduction of what is possibly the world?s only pension scheme that has defined both benefits and contributions.
More importantly, the decision by the trustees to pay an above-market rate return to members is symbolic of the lack of ?fiduciary? perspective at the EPFO Board. First, this money has not been earned but created by a kind of accounting that is of not much higher quality than Satyam. Second, if this mythical Rs 2,000 crore does exist, why not use it to fill in the EPS hole? Third, why reduce benefits under EPS and EPFO that are in good enough health to declare an investment bonus?
A trustee is trusted to act on behalf of somebody in the best interests of that somebody. It is now clear that EPFO trustees do not act on behalf of the members because the EPS hole is a bigger issue than the interest credit. And they are not unrelated issues but go to the heart of the ?fiduciary? perspective because the trustees have recently decided to lower benefits for all members under the EPS scheme by crimping return of capital, abolishing commutation and increasing before retirement penalties. The new rules abolish Para 13, which provided three options for return of capital. 1) If the employee opted for 90% of original pension (gave up 10%), then the return of capital was 100 times the original monthly pension. 2) If the employee opted for 90% of original pension (gave up 10%), then the widow got 80% of the original pension for her life and on her death or re-marriage, the nominee got 90 times the original monthly pension as return of capital. 3) If the employee opted to get a fixed monthly pension of 87.5% of the original pension for a period for 20 years, on completion of 20 years, he would get 100 times the original pension. After this no pension would be paid. The changes also delete Para 12A around commutation; this removed the option by which an employee who opted for 2/3rd of the original pension as reduced pension would have the balance 1/3rd commuted and paid 100 times the 1/3rd as a lump sum. The most damaging change is to Para 12(7), which has changed the 3% penalty per year for early withdrawal before 58 years, for example, if you opted pension 2 years ahead of the 58, the reduction was 3% x 2 = 6%.
The 3% has now been changed to 4%.
These details may seem mind numbing but are exactly why the EPFO board has so far not been held accountable for their action. This lowering of benefits violates the argument that this scheme is sustainable given the Supreme Court judgement when the introduction of EPS was challenged by many employers in 1991. Nobody disputes that the trustees are free to reduce benefits but they should be held accountable. The EPFO board today does not have trustees but hostages of vested interests. The new board must be replaced by professionals from members, people with administrative experience, and investment professionals.
EPFO is a government securities mutual fund that charges 425 basis points while the most expensive public sector government securities mutual fund regulated by Sebi charges 25 basis points. EPFO does not cover more than 15% of its mandated population and has more dormant accounts than live ones. EPFO, no doubt, needs a new board and the resources to improve its plumbing. But most importantly, it needs competition so companies can pay their monthly contribution to a panel of licensed asset managers and benefits administrators.
The author is chairman, Teamlease Services