Raising investment in equity not taken up in CBT meet

EPFO plan to enhance it from 15% to 20%

Raising investment in equity not taken up in CBT meet
A third member said the government did not want to tweak the threshold in the current volatile market conditions.

The Central Board of Trustees (CBT), the highest decision-making body of the Employees’ Provident Fund Organisation (EPFO) chaired by the Union labour minister, did not take up for discussion the proposal to enhance its investment in equities to 20% of the investible funds from 15% now.

A source present in the meeting said that though “the proposal for an amendment in the pattern of investment for increasing allocation of investible funds in equity-related investments from 15-20%” was there among 21 other agenda items for the two-day CBT meet that concluded Saturday, the government decided to withdraw the item from the agenda for discussion as, it feels, the matter needs further and deeper deliberations.

“The item was dropped. The CBT did not discuss the item at all,” said Sukumar Damle, national secretary, AITUC.

A third member said the government did not want to tweak the threshold in the current volatile market conditions. Also, it is apprehensive that any hike in the upper limit would cause an uproar in Parliament, currently in session, from the Opposition.

Any change in the pattern on investment requires amending the current pattern of investment. As per the current investment pattern, the EPFO can invest between 45-65% in government securities, between 20-45% in debt instruments, up to 5% in short-term debt instruments and up to 5% in asset-backed, trust structured & miscellaneous investments. It can invest between 5-15% in equities.

The Finance Investment and Audit Committee (FIAC) of the EPFO had in December recommended that exposure to equities be enhanced to 20% from 15% now. There was a near consensus on the need to raise the exposure to equities in that meeting.

The FIAC was of the view that there was a need to “strike a balance between risk and return” and the exposure should be increased to “leverage the return of equity investments.”

The EPFO started investing monies in equities in 2015-16 — August 5, 2015 to be precise — with a cautious exposure of 5%. The exposure was doubled in the subsequent year itself and taken to 15% in 2017-18.

The EPFO invests equities in the form of exchange traded funds (ETFS), both on the Nifty and Sensex platforms. With over Rs 2.1-trillion annual contributions by subscribers, the EPFO’s accumulated corpus is around Rs 18.43 trillion, as on April 30, 2022. Currently, EPFO invests 85% of its fresh investments in debt instruments.

EPFO’s proposal to invest more in equities is prompted by a handsome, over 16% (notional) return, as on March 31, 2022, through this route over the last seven years, which was nearly double the gains from debt instruments during the period.

“There has been a downward trend in yield on investments in fixed income or debt securities. The 10-year central government securities of G-sec issued by the RBI set the benchmark for rate of interest on these securities. Past investments of debt funds with returns higher than 9% are maturing while the reinvestment is yielding less than 8% returns. The trend results into stress on the rate of interest that EPFO declares, as major portion of the corpus (debt fund) continues to give declining income,” EPFO said in the agenda note for the CBT. The return on G-sec was 6.96% in 2021-22.

For 2021-22, the retirement fund body kept the return on PF investments for its 65 million subscribers at a four-decade low of 8.1%, partly because of the low-interest rate regime that prevailed in recent years. To make up for that, it had to redeem some of its investments in equity to find resources for the Rs 76,000-crore interest pay-out for 2021-22.

The EPFO invests equities in the form of exchange traded funds (ETFS), both on the Nifty and Sensex platforms. With over Rs 2.1-trillion annual contributions by subscribers, the EPFO’s accumulated corpus is around Rs 18.43 trillion, as on April 30, 2022.

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