EPFO may dip into its stock market profits to keep provident fund interest rate steady at 8.65%

The past few years have seen the interest rate on Employees' Provident Fund (EPF) headed downwards-from 8.8% in 2015-16 to 8.65% in the following fiscal, a four-year low. The retirement nest egg started to look even smaller for a while last year, when news reports suggested that the retirement fund body Employees' Provident Fund Organisation (EPFO) was planning to lower interest rates further for 2017-18.

Speculation was rife that the rate cut would be of around 25 basis points due to lower income on bonds, where the body invests bulk of its funds, and its plan to credit exchange traded fund (ETF) units directly into the accounts of subscribers.

Thankfully, the government has made a U-turn-perhaps in an attempt to woo the public in its last year in office before the general elections-and is now reportedly working on keeping the interest rate steady at 8.65%. According to the Indian Express, the government plans to manage this by selling shares worth Rs 2,000 crore that the EPFO had previously purchased.
 
Due to the market bull run, the EPFO was able to book an estimated extra income of Rs 850 crore on its investment, and this gain would be ploughed in as total earnings to determine the interest rate. "The Central Board of Trustees of EPFO would be meeting next month to finalise the PF rate and the modalities of the share sale. We will be asking the fund managers to cut down their commission to pass on the maximum benefit to the PF subscribers," sources told the daily, adding that "the final (income) number would depend on the share prices on the day of the sale." EPFO's 60 million subscribers will be awaiting positive news with bated breath.

The retirement body had started investing in the stock markets though ETFs in August 2015 and, according to Labour Secretary M Sathiyavathy, had "invested around Rs 32,000 crore" in the ETFs till November 2017. It has invested in ETFs run by SBI Mutual Fund, UTI Mutual Fund and the central public sector enterprises ETF run by Reliance Mutual Fund. Over the past year, the BSE Sensex has delivered 29% returns-more than three times what it pays members-making for a neat windfall for EPFO. No wonder media reports claim that it is planning to invest a greater proportion of PF savings in the markets-there is a proposal to hike EPFO equity investment limit from 15% to 25% over time.

But don't start dreaming about ever-fattening pension cheques just yet. Because the finance ministry has long been nudging the labour ministry to align EPF interest rate with that of small savings schemes administered by it, like public provident fund which currently earns 7.6% per annum.

With PTI inputs