About six years ago, a young reporter (I had recruited just a month earlier) came to me, grim-faced, with his salary slip. We had given him a decent pay hike, but his take home pay had turned out to be less than what he was getting in his previous channel.
I took a look at the salary statement, and showed him what the problem was. He was technically just a contract employee earlier, and now he had a regular salaried job. That meant a hefty chunk of his income was getting deposited in his EPF (Employees’ Provident Fund) or provident fund account.
“Don’t look so glum,” I told him. “This is good. EPFO is the safest place to park your money; it is forced savings and it comes at a very good interest rate.”
But the young fellow wasn’t convinced.
“I should have the right to do whatever I want with my money,” he said. “Why should the government decide that I have to save, if I don’t want to?”
He did have a point. The powers-that-be might tell you that your PF deductions are entirely for your own good, but in reality, its primary purpose is to mobilise captive public savings for the State. And, it is also locked-in for almost one’s entire working life.
Who Gets To Use The Money We Are Forced To Put In Our Employees’ Provident Fund Accounts?
Nearly half of it is converted into loans to the government, through various government securities. Another chunk is invested in listed bonds, issued by corporates, banks and other financial institutions.
Mainstream economists often crib that EPF investors are pampered using the taxpayer’s money.
It gets guaranteed high returns, even when long-term interest rates collapse. These economists say that EPFO’s (Employees’ Provident Fund Organisation) interest rate should be market-linked. A guaranteed interest rate puts an unnecessary burden on the Exchequer. There are two reasons why this argument is poppycock:
- First, as the reporter I mentioned earlier said, the EPF system forcibly takes money out of the salary of regularised employees, whether they like it or not
- Second, it is meant to work as a post-retirement nest-egg for those who don’t get pension. So, it is the government’s job to pay a high return on it and not hide behind the pressures of ‘market-forces’
But successive governments have faced this harangue of pink-paper-pundits, and have often tried to get out of their duty to deliver the promised interest rates. They have also used it to continuously push EPF funds into the stock markets. The logic was that it is impossible to give such high returns by investing only in debt. The only way to do it is to invest in stocks and shares.
It was resisted by employee unions and political parties for years, but finally in 2015, EPFO began investing a small part of its total money in the bourses. Right before COVID-19 hit India, it had about one lakh crore rupees invested in Exchange Traded Funds or ETFs, which tracks the ups and downs of benchmark indices like Nifty and Sensex.
And now, that punt has gone south.
- The powers-that-be might tell you that your PF deductions are entirely for your own good, but in reality, its primary purpose is to mobilise captive public savings for the State.
- And, it is also locked-in for almost one’s entire working life.
- Nearly half of it is converted into loans to the government, through various government securities.
- Having caused losses due to bad money-management, the EPFO is now dilly-dallying about paying the 8.5 percent that it had promised earlier.
- Now, if you are 25, and have another 35 years of EPF deductions lined up, these minor losses might not affect you. But think of those who are about to retire.
EPFO Dilly-Dallying About 8.5% Return: Implications
Instead of equities giving high returns, the Employees’ Provident Fund Organisation’s five-year experiment with ETF’s resulted in an 8.3 percent loss by the end of 2019-20. That’s the overall number. In some specific funds, the losses are as high as 25 percent.
Having caused these losses due to bad money-management, the EPFO is now dilly-dallying about paying the 8.5 percent that it had promised earlier. It still can’t decide whether the entire interest will be given at once or in two tranches.
Now, if you are 25, and have another 35 years of EPF deductions lined up, these minor losses might not affect you. But think of those who are about to retire.
It wasn’t as if the EPFO boss called them up and asked for their opinion before investing in the markets. Why should they bear losses that have been caused by sheer mismanagement (or worse)?
Not just netas and unions, several heterodox economists had warned the government against investing the people’s money in the markets. They said that share prices can be volatile, and that could affect the EPFO’s ability to meet its regular commitments – both in terms of interest payable to all investors and also the final amount payable to lakhs of people who retire every year.
Why Did EPFO & Modi Govt ‘Allow’ This Crisis To Brew?
The government countered them by saying that the markets always deliver in the long-run. But who cares about the long-run in COVID season? People with a lot of extra cash can afford to take risks with a part of their savings. Those who have a limited amount, want it to grow slowly and safely.
It is unconscionable that the EPFO – and therefore the Modi government – has allowed this crisis to develop for so long.
- Why was there no oversight?
- Why were fund-managers not investigated and replaced if they produced such dismal results?
What is even more unconscionable is that the forced savings of ordinary middle class salaried people has been used to prop up the markets with a one lakh crore-rupee fund injection. Who benefits from such governmental steroids to the stock markets? It is invariably the monied classes who play the markets and get even richer. Because we know, despite increased ‘retail’ participation in the markets, India has just about 4 crore DP accounts and 75 percent of them are inactive.
Losses Incurred By EPFO In Its Equity Investments: Key Learnings
There are some crucial lessons to be learnt from these losses incurred by the EPFO in its equity investments:
- The most important of these is to establish constant oversight and regulation. Secondly, individual contributors to the EPFO must be given the option to choose from a range of investments, much like the choice mutual funds offer.
- If someone wants a high proportion of equity, then that is how their portfolio should be organised.
- But, at the same time, others should have the option to say that they don’t want even a part of their money to go into the stock markets.
- And finally, the government has to ensure that everyone – even those who choose the most conservative investment options – get a better return than what fixed deposits deliver. Or else, EPF must be made optional.
You can’t force people to part with their money, and then tell them, sorry we messed up, we can’t pay you what we promised.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)