Oscar Fernandes? bold and right decision (taken in September 2008 when he was labour minister in UPA I) to appoint private sector fund managers to manage EPFO?s corpus will help pay an EPF rate of 8.5% for 2009-10 without dipping into any ?reserves?. But with the Centre working on a benign interest rate regime, EPF earnings may dip, given its debt-oriented investment pattern and restrictive trading rules. If that happens, the UPA must not hike PF rates again. It exhausted the possibility of paying artificially high rates in its first term.

In every single year of its first term, the UPA paid more in PF rate than the fund could sustain. The trend was started when the NDA decided to pay 9.5% interest on EPF in its last year in power (2003-04). With earnings enough to pay just 9%, it came up with the idea of declaring a 0.5% bonus to mark EPFO?s golden jubilee! (EPFO turned 50 in 2002.)

But what started off as a seemingly one-time sop became under the UPA an annual bad habit. For its first year in power, 2004-05, the UPA announced a 9.5% EPF rate though earnings were enough to pay just 8.5%. The decision was made as late as June 2005, though the EPF Act of 1952 stipulates that the EPF rate must be announced at the beginning of a financial year.

The gap between the EPF?s earnings and the funds required to honour the UPA?s 9.5% commitment was Rs 927 crore (mysteriously scaled down to Rs 716 crore later) in 2004-05. To bridge the gap, a little-known fund known as the Special Reserve Fund (SRF) was tapped into. In 2005-06 and 2006-07, it was dipped into again. With the SRF emptied, other quaint accounts like the Contingency Reserve Fund (which exists only in theory), Investment Fluctuation Account and the Interest Suspense Account were used to puff up the PF rate each year.

Almost Rs 1,940 crore were eased out of these ?accounts? by UPA I, leaving virtually no balance. There are several issues. One, the EPFO?s rules don?t allow it to pay members more than it earns, nor does it allow ?overdrawal? on the Interest Suspense Account. Two, subsidising a political ploy is not the ?special? reason for which the SRF was created?by partially withholding retirement savings from workers who left the EPFO net before completing 10 years of service.

While settling such workers? final withdrawal claims, the EPFO used to forfeit employers? 12% contribution and discount accumulations in the Employees? Pension Scheme 1995 to their current cash values. The money thus collected in the SRF was used to pay employees retiring from firms that had defaulted on their EPF contributions.

While it covers only 5% of India?s workforce (formal sector employees), EPFO is the only social security net for 5 crore workers. A crore of whom have filed withdrawal claims on their PF accounts in recent months. To put that in context, the PF claims workload in 2006-07 was just 32 lakh.

At the same time, slowdown-hit employers have been reneging on PF contributions. Even otherwise, rogue firms skip PF payments routinely. The EPFO Board?s executive committee was informed last year that nearly two-third of the 4.7 lakh firms under it default on workers? PF contributions. In some PF offices like Delhi, UP and Mumbai, the proportion of defaulting firms is higher than 80%. While defaults are the norm in Left-run West Bengal too, some firms pay PF rates on a whim?even as low as 3.75%? with the tacit support of their trade unions.

Sadly, when workers from defaulting firms will now approach the PF office, there will be no SRF to pay them with. A mere 3.6% of EPF members have balances of over Rs 1 lakh. Hikes in PF rates benefit mostly them. The 90% plus workers with low balances need the assurance that there will be money for them when they need it.