EPFO investments in market: Second-guessing everyone will kill all initiative

By: |
October 26, 2020 7:30 AM

Parliamentary standing committee pulling up the EPFO on its investments in the market is a good example of this

On the app, EPFO members can access 19 different services of EPFO through their mobile phone.On the app, EPFO members can access 19 different services of EPFO through their mobile phone.

A parliamentary standing committee (PSC), by its very nature, is supposed to keep a watch on matters that fall under its jurisdiction. So, it is hardly surprising that the PSC on labour should be looking into the affairs of the Employees’ Provident Fund Organisation (EPFO). What becomes problematic, however, is when the broad supervision becomes micro-management, even second-guessing. According to a report in this newspaper, the PSC has asked the EPFO to give it a written explanation on who took a decision to continue to invest when the stock market was falling.

Apart from the fact that the best time to invest in a market is when it is falling—assuming you can time a market’s ups and downs—it is not the job of the PSC, or the CAG for that matter, to examine trading strategies in such a micro manner. It is a short step from here to holding an official responsible for the ‘loss’, docking his pay and, possibly, even ordering a CBI inquiry. For years, we have seen officials holding back on divesting PSU shares as the market price was seen as too low. This may seem foolish to an outsider, but for anyone well-versed in how governments function, this seems an understandable precaution; after all, no one ever holds anyone responsible for not acting in time in a government system.Given the precipitous fall in the market caused a big loss to the EPFO—its investment value fell 8.3% in FY20 as compared to a growth of 14.7% in FY19—the PSC’s concern is valid. Indeed, it is this loss in market value which ensured that, after promising subscribers an 8.5% return in March, the EPFO was forced to give 0.35% in December on the assumption that it would be able to make good its losses on the amount invested in the market. The problem with the PSC action, however, is that it was completely inappropriate. When the EPFO took the decision on the 8.5% dividend, it had the money/assets for this. But instead of selling the equity then, the EPFO waited for the decision to the ratified by the finance ministry; by the time this happened, the market collapsed.

Ideally, then, the PSC should have advised the EPFO to ensure it has the money it needs before announcing a dividend. Several other broad issues pertaining to the EPFO also need to be flagged. For instance, what is it about the EPFO strategy that ensures its returns are mostly lower than the 9-11% the NPS offers even on debt instruments? Apart from asking the EPFO to justify its high commission levels, the PSC needed to be looking at how solvent the fund is. One of the proposals the PSC pushed was the recommendation of the EPFO’s Central Board of Trustees to raise the minimum monthly pension to Rs 2,000-3,000; the PSC wanted to know why no decision on this was taken for over a year now. But since all of this costs money, the PSC should have asked for sensitivity analysis on what happens to the EPFO’s balances at various levels of pension payouts. Indeed, it is not just the EPFO’s commissions that are a scandal—and anti-labour—the Employees’ State Insurance Corporation (ESIC) runs a health insurance scheme that has a payout ratio of just 35-50% as compared to 95-100% for most health insurance products run by public and private sector firms. It charges so much, and gives so little in return, it has accumulated surpluses of over Rs 90,000 crore; the annual surplus is around Rs 15,000 crore. Hopefully, the PSC will examine such issues too.

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