EPFO drags its feet, splits FY20 payout

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September 10, 2020 7:15 AM

During 2019-20, EPFO made a total investment of Rs 31,501.12 crore in ETF -- 71.15% in SBI MF, 22.5% in UTI MF and 6.35% in CPSE ETF.

The trustees resolved to meet again in December to decide whether and when to credit the balance 0.35% to the beneficiary accounts.The trustees resolved to meet again in December to decide whether and when to credit the balance 0.35% to the beneficiary accounts.

The pandemic is spreading its tentacles to financial investments perceived to be immune to such cataclysmic events. The board of trustees of the Employees Provident Fund Organisation (EPF) on Wednesday indicated that at this juncture it would credit only 8.15% interest to around 6 crore subscriber accounts for the financial year 2019-20. It had fixed the rate for the year at 8.5%, itself an 8-year low, in March.

The trustees resolved to meet again in December to decide whether and when to credit the balance 0.35% to the beneficiary accounts.

The board chose to transfer only the income generated out of investments in bonds and other fixed income securities to the subscribers for the time being. EPFO’s return on equity investments that are still less than 5% of the total EPF corpus, had fallen into the negative territory due to the stock market crash in March. Its plan to mobilise proceeds for the 0.35% part of the interest rate promised to subscribers from capital gains to be realised from a section of its fledgling equity portfolio, therefore, went awry. It would now bide time.

Of course, the EPFO will go ahead with the Board-approved plan to sell exchange-traded fund (ETF) investments of Rs 6,000 crore made in 2016; it hopes to fetch capital gains of Rs 2,700 crore via this transaction by December 31, 2020.

According to a statement issued by the government, “(The interest rate) of 8.50% would comprise 8.15% from debt income and balance 0.35% (capital gain) from the sale of ETFs subject to their redemption by 31st December, 2020. It further recommended to account such capital gains in the income of the financial year 2019-20 as being an exceptional case”.

The EPFO’s outgo on providing returns to subscribers at the rate of 8.5% for the financial year 2019-20 is estimated at Rs 60,700 crore.

The body started investing in equities via the Sensex and Nifty ETFs in August 2015; initially, it decided to invest 5% of fresh inflows in stock markets; and raised it to 10% in 2016-17 and 15% in 2017-18. Although the retirement fund body’s equity investments looked promising initially, the rate of return (XIRR), according to a Crisil estimate, fell to (-)8.29% at end-FY20 due to a market crash in March. EPFO had invested a little over Rs 1.03 lakh crore by then in ETFs ( after adjusting for redemption of Rs 2,686.51 crore in 2017-18).

The bulk of EPFO’s equity investments is in SBI ETF and UTI ETF, while it also has an exposure to CPSE ETF and Bharat 22 ETF. CPSE ETF and Bharat 22 ETF have given negative returns of 24.64% and 22.67%, respectively, in the last one year, according to Value Research. CPSE ETF has continued to give negative returns even over the last three-year and five-year periods (-13.92% and – 2.86%, respectively).

SBI ETF has, however, given returns of 4.76%, compared to category average of 3.37% in the last one year. While the returns for five years and seven years have been over 10%, in the last one-year, the Sensex has gained just 3.13%.

During 2019-20, EPFO made a total investment of Rs 31,501.12 crore in ETF — 71.15% in SBI MF, 22.5% in UTI MF and 6.35% in CPSE ETF.

KE Ragunathan, a CBT member representing employers, said earnest efforts will be made to credit the interest to subscriber accounts as soon as possible.

The Board also approved a proposal to amend paragraph 22(3) of Employees’ Deposit Linked Insurance Scheme, 1976, to enhance the maximum assurance benefit to Rs 7 lakh from the present maximum assurance benefit of Rs 6 lakh. “This amendment will provide additional succour to families and dependents of members of the scheme in case of their unfortunate death while in service,” the statement said.

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