The EPFO should let us track its equity portfolio
PremiumThe guardian of our retirement nest eggs mustn’t raise its 15% cap on stock holdings until it shows it has the skill-sets needed to manage risky assets. Safety should remain top priority
Pressured by low returns on its debt holdings, India’s Employee Provident Fund Organisation (EPFO) is reportedly mulling a proposal to invest more money in equity. The Finance Investment and Audit Committee wants the cap on stock investments by our state-run retiral fund raised to 25% of incremental inflows (from 15% in two phases); EPFO trustees are slated to take up the idea later this month. This comes soon after the finance ministry approved a 40 basis points payout slash for 2021-22. Subscribers of this statutory scheme will get 8.1% on their balances, down from 8.5% the year before. While this may have caused some heartburn among those counting on PF savings for old-age security, a likely majority of its 50 million-odd total, they probably realize it’s still a better rate than what low-risk savings can get elsewhere in today’s low-rate economy; banks cannot afford to pay anything close. As relying mostly on debt makes it hard for the EPFO to sustain premium payouts, a bigger portfolio of shares—as held by pension funds globally—is seen as the answer. In theory, that’s true. But let’s not rush it.
While returns from debt can fail to even beat inflation, especially if held to maturity without churn, and equity could indeed provide a boost, this requires special skill sets that we do not know the EPFO has acquired yet. It began in 2015 with a 5% equity limit, which was upped to 15% in 2017, but the performance of its portfolio remains a mystery, as it only puts out broad surplus numbers (these have been underwhelming in recent years). Until this opacity is addressed, pushing further ahead would be unwise. In general, employees who have a slice taken from their salaries for the fund need to be kept better informed. Qualms stem not just from doubts over its ability to pick assets that maximize value, but also from possible conflicts of interest that may arise from the government’s own agenda (like disinvestment), as seen with other state-owned entities whose purchases often reflect goals of the state more than customers. As of now, the fund’s equity portion is reported to be held via specified exchange traded funds. This sounds relatively safe. But what’s needed is full disclosure, stated upfront for all to track. Else, it must not subject an even larger portion of our nest-eggs to vagaries of the stock market. These are volatile times, too, let’s not forget.
Safety must remain the basic promise of any such fund. The EPFO should therefore keep investment risks within the bounds of that assurance. Yet, what it yields for subscribers cannot keep falling. No doubt, a premium rate can distort our credit market by attracting discretionary savings that banks could’ve lent for more productive purposes. Lenders have a valid grouse about deposits being lured away by PF top-ups and other high-paying government schemes. But a recent top-up limit has capped this effect. Moreover, while it clearly interferes with the efficacy of India’s monetary policy in loosening mode (as the rate gap widens and banks lose savings to it), relatively high PF awards should not be a bother if bank rates of interest are on the rise. April inflation at almost 8% and the central bank’s projected path of rate hikes would argue for a higher PF payout for 2022-23. This would also buoy small savings scheme rates, a pool that’s partly used to finance the Centre’s fiscal deficit. So that’s yet another reason to pay more. The EPFO’s challenge, as bond prices drop and yields go up this year, is to achieve this with debt instruments.