EPFO needs restructuring, not changes

The EPFO (Employee’s Provident Fund Organisation), established in 1952, with the responsibilities for provident fund and pension services, is reportedly considering amendments to its Act.

There is widespread consensus that for the EPFO to provide quality and quantity of services commensurate with the costs it imposes on members and on the country, it needs to become more competent and benchmark its management practices, and levels of transparency, and accountability to international best practices.

The above, therefore, should be the basis for accessing the proposed amendments. The assessment should include what is proposed i.e. acts of commission, as well as acts of omission i.e. what is left out of the amendments.

Media reports suggest that the key amendments to the EPFO Act being considered are the following:

Covered businesses:
The proposal discontinues the current practice of specifying industries to which the EPFO Act applies. Section (1b) of the Act therefore is to be reworded to cover every establishment regardless of the industry, engaging twenty or more workers.

This is the step in the right direction. However, the EPFO has, by its own admission, not acquired capacity to administer establishments below 20 employees. This is well above the international norm for coverage is business with five employees or more. The opportunity cost is that between five and 10 million workers are unable to access provident and pension fund services at the time when India is rapidly ageing. The EPFO management and labour ministry must be held accountable for this huge opportunity cost.

Extending the coverage to selected contract workers:
The proposal under Section 16(1) of the Act is to extend Employee Provident Fund benefits to contract workers in establishment under the control of government.

The increase in statutory levies for contract workers is likely to be detrimental to creation of jobs. This is particularly relevant in view of the dismal jobs creation record of the UPA government. Thus, the official figures by the NSSO (National Sample Survey Organisation) suggest that there were about 60 million jobs created between 1999-2000 to 2004-2005 before the UPA formed the government, but only 2.6 million jobs were created during the 2004-05 to 2009-10 periods.

Increasing statutory levies raises cost of hiring workers, and servicing their PF accounts is also more costly as a proportion of their contributions. When the EPFO has not acquired greater capacity to cover establishment below 20 employees, such a measure to cover contract workers under the EPF appears to lack sufficient planning.

Ending the provisions for exempting organisations from the EPF Scheme:
It is proposed that the funds of the currently exempted organisations supervised by the EPFO be returned to the EPFO, who will then undertake the investment management functions.

Exempted organisations, however, will continue to perform administrative functions and presumably continue to pay the EPFO specified regulatory charges. The rationale is that this will help protect the member’s funds.

The proposal will provide greater control of funds to the EPFO and increase its future cash flow. This may give  EPFO incentives to pursue politically motivated interest rates, and other measures, whose long run financial sustainability and viability is suspect.

This is a retrogressive amendment proposed by the EPFO. It is an admission by the EPFO that it has failed to combine the role as a service provider with that of a regulator of exempt funds.

The proposal will increase administrative cost as it creates an extra layer, whose cost will have to be borne by the members, reducing the benefits. As the EPFO’s administrative charges at more than 4% of the payroll are substantially higher than the private sector mutual funds, the benefits to the members will be reduced further.

A strong case can be made that providing choice to currently exempt funds to join well designed and regulated alternatives, such as the New Pension Schemes (NPS), would be a more desirable option for members and for the country.

Monopolising investment of all funds within the EPFO will be against increased choice to members, and will hide information as to what the alternative investment policies can do. This is again contrary to international norms and practices.

As the current investment of the EPFO are around Rs350,000 crore, the all debt portfolio, heavily weighted towards the public sector, is resulting in opportunity costs to members in terms of lower returns as compared to a more balanced debt and equity portfolio which is the international norm.

The EPFO’s all debt portfolio is also loosening fiscal discipline at the time when the combined deficit exceeds 10% of GDP; and is permitting disproportionate influence of foreign institutional investors on India’s capital market. 

The Acts of Omission:
There are no amendments reported for the Employee Pension Scheme (EPS) scheme which is substantially underfunded. By some estimates, the actuarial deficit of the EPS Scheme is around Rs50,000 crore.

There are however indications that the EPS is being reviewed, and modifications are likely once the review is complete. The review must however, publicly provide the independent actuarial report on the long run term asset and liabilities of the EPS, and how the EPFO intends to address any mismatch now and prevent it occurring in the future.

The public disclosure and debate of actuarial reports of the EPFO Schemes on a regular basis will be consistent with the international norms, and increased emphasis on transparency and accountability. The Comptroller and Accounting General of India reports on the EPFO should be discussed by the EPFO board and the substance of the deliberations and subsequent actions should be made public.

There are no amendments suggested in the current unwieldy and dysfunctional governance structure. The Central Board of Trustees (CBT) has 45 members, all appointed by the Minister of Labour. There are no regular advisory committees who can bring new developments and expertise to the CBT or to the EPFO management. Unwillingness of the EPFO to develop in-house investment management expertise is also constraining its ability to adhere to modern investment practices. The proposals do not appear to recognise this aspect.

The above analysis strongly suggest that for the EPFO to fulfill its assigned socio-economic responsibilities, it would need to undertake fundamental restructuring of its governance structure, legislative mandate, implementing regulations, and management practices. The proposed amendments fall far short, and therefore merit serious reconsideration.

The writer is a professor at the Lee Kuan Yew School of Public Policy, National University of Singapore and can be reached at sppasher@nus.edu.sg. Views are personal.