Much of the discussion, to the extent there has even been one, on the Employees Pension Fund Organisation (EPFO) has been on the composition of its investment schemes. While some in the ministry of finance are keen that the EPFO starts investing more of its corpus in the stock markets, the largely trade union dominated EPFO board thinks this is a risky proposition?they talk of the US crash as against the argument that, in the long run, investments in the stock market yield a better return than on debt. The problem in the EPFO, however, goes way beyond whether the investment is made in equity, or debt, or both. For one, the EPFO remains so antiquated, it doesn?t even have double-entry book-keeping?which means that, in case there is some fraud, the EPFO?s accounting system won?t be able to trace the funds. There are serious issues in not being able to get actual data on the number of subscribers the EPFO has, in getting refunds on time, on getting contributions transferred across cities and so on.
An even bigger problem is the huge, and growing, gap in the Employees Pension Scheme (EPS)?the EPFO is divided into the Employees Pension Fund and the EPS?where the latest reports suggest that the gap is over Rs 54,000 crore. That is the difference between what the EPS has to give as an annual pension to its clients and the money that it has invested?so, if the scheme has to be closed today, and the EPS?s pension payment liability is discounted, the difference in the net present value of the pension liability and the EPS corpus is Rs 54,000 crore. This amount was around Rs 22,000 crore 5-6 years ago. At what rate it will grow is difficult to say, but when the scheme was formulated, the annual rates of return available on safe investments was over 15%?at that interest rate, it was fully funded. With rates crashing and the benefits not reducing accordingly?the EPS fixes the pension regardless of the returns the corpus fetches?the gap is likely to rise by leaps and bounds.
A solution that has been talked of for years, but not implemented, is to find ways to pare the benefits. While that will take its time, and the government will continue to fill the EPS gap, another question arises. If new government employees are now free to choose, through the New Pension Scheme, who will manage their pension schemes, how much of the investments will be in debt and how much in equity, why isn’t the same facility being offered to private sector employees? After all, if the idea of a compulsory pension contribution is to ensure individuals have some security for their old age, the same purpose can be achieved by, while keeping pension contributions mandatory, allowing people to invest in the New Pension Scheme instead of the EPFO.