With the Election Commission likely to announce the Lok Sabha election dates soon after the Parliament session ends on February 26, the labour ministry is set to declare the Employees? Provident Fund (EPF) rate for 2008-09, before the code of conduct for the polls come into play. The Central Board of Trustees of the EPFO, chaired by labour minister Oscar Fernandes, would meet on Sunday to declare an EPF rate of 8.5% even though the scheme?s income can only support an interest payment of 8.25%.
This is the second year in a row that the EPF rate will be an ?unsustainable? 8.5% even though estimated earnings can support a payout of only 8.25%. Moreover, these estimates were made in March 2008, and yields on government securities, EPFO?s chief investment avenue, have fallen much lower in the second half of the financial year.
In 2007-08, the shortfall in earnings for an 8.5% payment was Rs 264 crore ? a gap that was bridged by dipping into an ?investment fluctuation account?, which records differences between the purchase price of a security and its value at the end of a year. Retaining the EPF rate at 8.5% for 2008-09 needs a gap of Rs 140 crore to be bridged.
A Special Reserve Fund, maintained to clear PF claims of workers whose employers have defaulted on PF contributions, has already been wiped out with nearly Rs 1,000 crore being diverted from it to support ?higher? than sustainable EPF rates in recent years.
To fill the 2008-09 gap, the UPA has found another hidden account that hadn?t been tapped in the past, raising questions about the quality of EPFO?s book-keeping. A panel set up to examine the accounts of EPFO along with its interest rate announcements since 2000-01, managed to find Rs 150.56 crore of contingency reserves that could be diverted to fund the Rs 140 crore deficit.
Incidentally, the Rs 150.56 crore balance in contingency reserves had accrued by 2005-06 and was to be used to ?subsidise? the EPF rate for 2006-07. But neither was the reserve utilised for that year?s interest payment, nor was the balance in it revised. The Finance and Investment Committee of the EPF board has okayed the use of the reserves given that ?precedence? of dipping into such funds has already been established in recent years.
The EPF rate has become a political tool rather than a simple accounting decision over the last seven years, ever since NDA?s labour minister, the late Sahib Singh Varma, announced a special 0.5% bonus over the EPF rate of 9% as per its earnings, ostensibly to celebrate EPFO?s golden jubilee. According to the EPF Act of 1952, the interest rate is to be decided at the beginning of a financial year, but this norm has also been disregarded in recent years.
This year, a decision on the interest rate had been deferred a few times thanks to the Poll code for several state elections. Though the Code doesn?t stop the Centre from taking routine administrative decisions, an unsustainable PF rate could be questioned at the time.
The Pension Fund Regulatory and Development Authority set to launch a new pension scheme for citizens from April?the first direct competition EPFO will face in its 57-year-old existence.