Fri, Aug 8 02:23 AM
After over two years of dithering on a plan to break the State Bank of India's monopoly in managing the investments of another monopoly - the Employees' Provident Fund Organisation (EPFO) - the government has finally done it. Last week, Labour Minister Oscar Fernandes cleared the appointment of three new private sector fund managers to manage the EPFO's monies along with the SBI.
All employee unions, except the Congress-affiliated INTUC, have opposed the move. The Left parties are particularly annoyed at Reliance Capital's last-minute entry into the final list of appointees. The unions are not alone: the dozen-odd fund managers who missed the final list are also fuming. Two bidders are upset as their offers to manage the money at zero fees were disqualified. A few others question the entire selection process - the way the technical scores were arrived at, how the final selection seemed to reflect a thinking that any fund manager would do as long as they are cheap, and so on.
Some have labelled the move as foreshadowing big-ticket financial sector reforms from the UPA in its last few months, and are also claiming that competition among the new fund managers will boost the EPF rate from the currently abysmal 8.5 per cent, as the government has sought to suggest.
But it's not that simple. The real stakeholders - who have 24 per cent of their current income mandatorily deducted towards EPFO's three schemes in the name of old-age security - must not get taken in by the glib talk. The move is nothing but minor tinkering; it may increase yields on PF monies by 10-20 basis points at best, but it makes for good optics.
Consider this: when interest rates on government securities had slipped to around 7 per cent in 2002, the EPFO was paying out 9.5 per cent. Today, when risk-free bank deposits earn nearly double-digit returns, the EPFO is struggling to pay 8.5 per cent. This is because when the EPFO invests in a security, it is required to hold it till maturity. So when interest rates are falling and securities with older coupon rates earn a premium, the EPFO can only sit back and watch.
A similar opportunity was lost in equities, where investments were allowed by the finance ministry in January 2005, when the Sensex was around 6,000. The EPFO board's refusal to allow equity investments has meant that Indian employees missed out on the market surge, while pension funds benefited worldwide.
Simply put, the new fund managers have to work within the same limitations - an investment pattern that prescribes a bulk of the PF money to be invested in gilts and no leeway for active trading. So apart from removing the inefficiencies from the SBI's monopoly management era, there's little room for boosting returns.
That reforms are necessary to extend old-age cover to the entire Indian workforce (as compared to the 5 per cent the EPFO covers) is obvious. What constitutes reforms, however, seems to have been lost in bureaucratic vacillation and executive confusion.
After more than a decade of work, the finance ministry is close to fully operationalising the New Pension Scheme for government employees as well as unorganised sector workers. The Pension Fund Regulatory and Development Authority (PFRDA) has already appointed three fund managers (albeit, from the public sector) and done a test run of the central record-keeping agency (NSDL's) systems. Conscious of the SBI's conflict of interest as banker and fund manager, Bank of India has been picked as the banker.
Meanwhile, North Block is set to bring in all company-run PF trusts into a similar structure and make it mandatory for them to appoint professional fund managers. The EPFO's appointment of new fund managers needs to be seen in this bigger context, as it does not change the other two roles of record-keeping and collections and disbursals. There is a move to rope in more bankers to abolish the SBI's banking monopoly as well, but it will take at least two years if the fund managers' appointment is anything to go by. A recent audit of EPFO offices across the country found that over 90 per cent of employers are defaulting on PF contributions. Worse, over 95 per cent (in some places even 99 per cent) of employees' accounts were inaccurately maintained. Any other financial entity in such a shape would have imploded, but the country's second-largest non-banking financial institution continues unquestioned and without any course corrections.
For employees' and even taxpayers' sake, a much simpler reform agenda would be to get the EPFO to plug into the PFRDA architecture, instead of duplicating its efforts. Instead of the SSN cards that the EPFO has been trying to allot to all members in recent years, employees can simply register with NSDL for centralised record-keeping. This would ensure portability of retirement benefits, whichever safety net an employee chooses - the EPF or the PFRDA. Piece-meal moves such as we have just seen certainly won't ensure the long-term interest of employees.
vikas.dhoot@expressindia.com
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