EPFO's proposed exit policy may increase interest on your retirement saving

Retirement fund body Employees Provident Fund Organisation (EPFO) has decided to bring out an exit policy to liquidate its investments in government securities, exchange-traded funds (ETFs) and state loans to maximise returns for its members. 

The EPFO has no exit policy at present as it largely invests in government securities that have a definite maturity window.

The news comes even as the Union Finance Ministry is believed to have permitted the Labour Ministry to go ahead with 8.65 per cent rate of interest on employees' provident fund for 2016-17, which will benefit over four crore EPFO members. 

The issue was discussed at the recent meeting of EPFO's apex decision-making body, the Central Board of Trustees (CBT), on April 12, where its Chairman and Labour Minister Bandaru Dattatreya had assured the trustees of bringing out an exit policy. 

The EPFO is under pressure to offer higher interest rate on EPF to its around 40 million subscribers. 

The CBT had decided to provide 8.65 per cent interest on EPF deposits for 2016-17 in December last year. But the finance ministry had not approved the same and asked the EPFO to reduce it by up to 50 basis points to avoid any deficit. 

The EPFO had entrusted a Bengaluru-based management institute with the task of framing the exit policy, which is expected to provide a basic blueprint. 

"The policy will be vetted by the EPFO's advisory body Finance Audit and Investment Committee at its next meeting expected soon. Thereafter it will be tabled in the CBT for consideration and approval," an EPFO trustee and Bharatiya Mazdoor Sangh leader P J Banasure told PTI.He said, "In the absence of exit policy, the EPFO has not been able to maximise its returns on its investments. Even in the case of government securities, the EPFO can sell the bonds in open market and earn huge margin before maturity." 

He is of the view that there is no point increasing the investments in ETF unless the EPFO has an exit policy. Citing an example, he said the ETF investment yield was about 14 per cent before demonetisation, which fell to around eight per cent after the note ban and but recovered to 13 per cent. 

Thus, the EPFO has missed the bus to earn 14 per cent on its ETF investments before demonetisation in the absence of an exit policy. 

Banasure said there was a broad consensus in the CBT that there should be an exit policy for the EPFO before raising investments in the ETF to 15 per cent of the investible deposits, from the current 10 per cent. He is also of the view that the central body can maximise returns by timely liquidating investments in bonds and state loans depending on market conditions. 

The EPFO had entered the stock market by investing five per cent in August 2015, which was raised to 10 per cent last year. 

In view of the volatile nature of stock markets, the EPFO had then decided to start with investing just five per cent of its over Rs 1 lakh crore investible amount in ETFs.The EPFO has invested Rs 18,069 crore in ETFs till February 18.

Interest rate should not result in deficit for the fund

The Finance Ministry in its communication to the Labour Ministry has, however, put a rider that the interest rate should not result in a deficit for the retirement fund. This will enable the Labour Ministry to provide 8.65 per cent rate as decided by the Employees' Provident Fund Organisation (EPFO) trustees.

According to EPFO estimates, the fund will see a surplus after providing 8.65 per cent interest rate for the last fiscal. 

A reluctant Finance Ministry had been nudging the Labour Ministry to lower the EPF rate to below 8.65 per cent as approved by the EPFO trustees in December last year. 

"The Finance Ministry in its recommendation to the Labour Ministry said it is up to the latter to decide on what interest rate should be given. However, it should be ensured that there should not be any deficit to the fund," according to a source.