As fund size of EPF increases, it will be forced to invest in equities: EPFO commissioner
As the fund size of the EPF increases, it will be forced to invest in equities, EPFO Commissioner KK Jalan tells Money Today.
EPFO Commissioner KK Jalan. PHOTO: Sounava Ray Sarkar
As the fund size of the EPF increases, it will be forced to invest in equities, EPFO Commissioner KK Jalan tells Dipak Mondal.
Q. A number of changes have been introduced by the EPFO through the use of latest technology. These include ability to check balance & claim status online. What has been the response of employees and employers?
A. The major change that has occurred over the year is the electronic challan-cum-return. This is useful for both employers and employees. Employers earlier had to file five separate returns. Now, they have to file only one return, and that too electronically
For employees, the amount goes directly to their account. So, they can now see the deposited amount in their account online. It also makes our work easier in terms of knowing how many establishments have filed challans and for how many employees.
So, it is a win-win for all-employers, employees and the EPFO. Now, we can plan better. A lot of other systems have also been built on the challan set-up, for instance, annual account upgrade and online transfer.
Q. Can operating an EPF account be made as easy as operating a savings bank account?
A. It will take time, but that should be our intention. If we don't do this, we will not be offering the best services. We should try to reach that level, sooner or later.
Q. What are the things you need to do to achieve that?
A. Today, the organisation (EPFO) is employer-centric, which means employers give provident fund numbers to employees. We will have to take this over. We will have to give PF numbers to employees ourselves. We also need to offer universal numbers and separate accounts to employees.
10.5%
The next one year will be challenging for the EPFO. The EPFO staff should recognise that with the passing of the pension Bill, a number of private players will enter the sector. They will bring new technology, and unless the EPFO updates its technology, it will lose.
You see when private banks came in large numbers, public sector banks had to improve their services. They had to adopt core banking solutions.
The EPFO will have to adapt to the changing scenario. Therefore, as I said, the next one year will be challenging, and we should take up the challenge as quickly as possible.
Q. You are basically saying that the EPFO should directly interact with employees.
A. What I am saying is that we should devise a methodology through which we can have direct interaction with employees. That is why we are talking about a universal provident fund number which will remain the same irrespective of where the person is working.
Q. Has there been any progress towards this?
A. There has been some progress. We are to take a call. We have tried to launch such numbers three-four times in the past. Therefore, we are having internal discussions. There are many ways (centralised/decentralised) of doing it. There are a lot of technological, administrative and legislative challenges. We will also have to take various approvals. For example, we will have to take approval for amending the scheme, which will be done by the ministry. I need the technology to do that and at the same time take the staff along.
When you go for an upgrade of technology, it must be robust, in line with the legislative working, and it must be acceptable to the staff.
Q. Last year, an internal EPFO notification that the EPF contribution will be based on the total salary and not just the basic pay, unnerved salaried people. The issue may have been put on the back-burner but is yet to be resolved. What could be the resolution and when can we expect it?
A. You are talking about the 30 November 2012 circular. It is still in the ministry. It was not a change in the law. It was a uniform interpretation of the law, which the Madras High Court had already done. Somehow people thought it's a change. It is not. In any case, the matter is with the ministry, and it will take a call on it.
Q. Some experts say this will not affect employees whose basic salary is more than Rs 6,500 a year.
A. Why should it affect? If your basic salary is already more than Rs 6,500, it should not affect you. In any case, your contribution to the EPF is to a great extent voluntary. You need not come to the EPFO at all.
Q. But some experts say that once you are in the EPF, you are always a part of it.
A. This is not the case. The issue is that if you are in the EPF when your basic salary is below Rs 6,500, you should not be deprived of the benefit if your basic salary crosses Rs 6,500. Thus, one of the interpretations is that once you are in the EPF, you are always a part of it. This is to ensure employers do not misuse the law (by depriving employees of EPF benefits).
Once you have left an organisation, you are no longer a part of the EPF. If you join another employer in two months, how will the EPFO come to know about it?
Q. Is it not mandatory for establishments with more than 20 employees to be a member of the EPFO?
A. Yes, it is mandatory, but they can always say that their employees are drawing a basic salary of more than Rs 6,500 (and not contribute). They will just have to pay the administrative charge. There are many organisations which are paying this charge, which is a ridiculously low amount of Rs 7. We are going to revise it. I have just noticed it and have asked my office to revise it as collection costs are more than this.
Q. What will be the new charge?
A. Let us first try to amend the law. The proposal will go to the labour ministry.
Q. There is talk about increasing the ceiling of Rs 6,500. Is there any plan to increase the ceiling, and if yes, by how much and by when?
A. Yes, there is a plan to increase the ceiling. A Cabinet note has been moved to increase it to Rs 10,000. We are even asking for an increase to Rs 15,000 as in the ESI (Employee State Insurance) Scheme. A lot of deliberations have taken place, but again it's a legislative call. We are just the implementing authority. As the head of the EPFO, I feel there is a case for an increase. But I don't know when it will happen.
Q. The Central Board of Trustees recently relaxed the investment norms for EPF funds. Now, you can invest in long-term PSU bonds, besides AAArated private bonds. How much will these allow you to increase returns?
'We are
A. That is what the government wants. You see the intention is two-fold-getting more returns and ensuring safety of the corpus.
Now, our investments in government of India securities will come down. Investments in state securities may also come down, while investments in public and private sector bonds may go up. Since public and private sector bonds give higher returns, we expect to earn more.
Q. Ever since the New Pension System (NPS) has been opened for all, there has been a comparison between the NPS and the EPF/EPS. Do you think it's fair? How will you compare the two?
A. Our return on an annualised basis in the last four years (May 2009 to May 2013) is better than that of the NPS. We have given 10.47% compared to 9.85% and 9.17% delivered by the NPS' central and state government schemes, respectively. I am happy to report that the EPF is giving better returns. It also enjoys tax benefit on withdrawal, which is not so in the NPS at present.
(According to the EPFO, the NPS indicates cumulative return, while the EPF declares annual returns. Besides, NPS returns are calculated on the basis of the net asset value, which in turn reflects the current market price of the assets being managed. In contrast, EPF accounts its assets on cost price. Therefore, a huge profit on account of the premium price of the assets being held is not reflected in EPF returns.)
Q. How will the pension Bill change the scenario?
A. There are voluntary contributions that may get impacted by the arrival of private pension funds. The EPFO needs to give better service. There were some serious issues regarding EPF services. If we improve our services, as we have started doing, there is no reason why we will not be able to compete with private pension funds even in returns.
Q. The NPS is trying to encourage corporate houses to make their employees join the scheme. It also offers additional tax benefit to employees contributing through their employers. Do you see the NPS as a competition to the EPF?
A. While I won't be able to comment on the tax benefit part, as far as competition from the NPS is concerned, I will take it in a positive manner. What I have been telling our officials is that we must improve our services. We have been doing well, but we are working in a statutory regime. We need to get out of that mindset and work in the service regime.
Q. According to experts, the NPS has an edge over the EPF because it offers equity exposure. Even the finance ministry has given hints that it is okay if the EPF invests in equities. It seems the only resistance is from trade unions. Will EPF funds ever flow into equities?
A. The finance ministry is okay with 5-15% funds in equities. But the Central Board of Trustee (CBT) has put stringent conditions related to companies in which the EPF can invest. That's why very few options are available. Besides, the current scenario is not giving us enough courage to invest in the market.
But I won't say that the EPF will never invest in equities. When our fund size increases further, getting good debt instruments can be a problem. Then, we will be forced to invest in equities. So, I won't say we will never invest in equities.
Q. A number of changes have been introduced by the EPFO through the use of latest technology. These include ability to check balance & claim status online. What has been the response of employees and employers?
A. The major change that has occurred over the year is the electronic challan-cum-return. This is useful for both employers and employees. Employers earlier had to file five separate returns. Now, they have to file only one return, and that too electronically
For employees, the amount goes directly to their account. So, they can now see the deposited amount in their account online. It also makes our work easier in terms of knowing how many establishments have filed challans and for how many employees.
So, it is a win-win for all-employers, employees and the EPFO. Now, we can plan better. A lot of other systems have also been built on the challan set-up, for instance, annual account upgrade and online transfer.
Q. Can operating an EPF account be made as easy as operating a savings bank account?
A. It will take time, but that should be our intention. If we don't do this, we will not be offering the best services. We should try to reach that level, sooner or later.
Q. What are the things you need to do to achieve that?
A. Today, the organisation (EPFO) is employer-centric, which means employers give provident fund numbers to employees. We will have to take this over. We will have to give PF numbers to employees ourselves. We also need to offer universal numbers and separate accounts to employees.
10.5%
is the annualised return EPF/EPS has given in the last four years (May 2009-May 2013) compared to 9.85% delivered by the NPS' central govt scheme.
You see when private banks came in large numbers, public sector banks had to improve their services. They had to adopt core banking solutions.
The EPFO will have to adapt to the changing scenario. Therefore, as I said, the next one year will be challenging, and we should take up the challenge as quickly as possible.
Q. You are basically saying that the EPFO should directly interact with employees.
A. What I am saying is that we should devise a methodology through which we can have direct interaction with employees. That is why we are talking about a universal provident fund number which will remain the same irrespective of where the person is working.
Q. Has there been any progress towards this?
A. There has been some progress. We are to take a call. We have tried to launch such numbers three-four times in the past. Therefore, we are having internal discussions. There are many ways (centralised/decentralised) of doing it. There are a lot of technological, administrative and legislative challenges. We will also have to take various approvals. For example, we will have to take approval for amending the scheme, which will be done by the ministry. I need the technology to do that and at the same time take the staff along.
When you go for an upgrade of technology, it must be robust, in line with the legislative working, and it must be acceptable to the staff.
Q. Last year, an internal EPFO notification that the EPF contribution will be based on the total salary and not just the basic pay, unnerved salaried people. The issue may have been put on the back-burner but is yet to be resolved. What could be the resolution and when can we expect it?
A. You are talking about the 30 November 2012 circular. It is still in the ministry. It was not a change in the law. It was a uniform interpretation of the law, which the Madras High Court had already done. Somehow people thought it's a change. It is not. In any case, the matter is with the ministry, and it will take a call on it.
Q. Some experts say this will not affect employees whose basic salary is more than Rs 6,500 a year.
A. Why should it affect? If your basic salary is already more than Rs 6,500, it should not affect you. In any case, your contribution to the EPF is to a great extent voluntary. You need not come to the EPFO at all.
Q. But some experts say that once you are in the EPF, you are always a part of it.
'The EPFO will have to adapt to the changing scenario. The next one year will be challenging'
Once you have left an organisation, you are no longer a part of the EPF. If you join another employer in two months, how will the EPFO come to know about it?
Q. Is it not mandatory for establishments with more than 20 employees to be a member of the EPFO?
A. Yes, it is mandatory, but they can always say that their employees are drawing a basic salary of more than Rs 6,500 (and not contribute). They will just have to pay the administrative charge. There are many organisations which are paying this charge, which is a ridiculously low amount of Rs 7. We are going to revise it. I have just noticed it and have asked my office to revise it as collection costs are more than this.
Q. What will be the new charge?
A. Let us first try to amend the law. The proposal will go to the labour ministry.
Q. There is talk about increasing the ceiling of Rs 6,500. Is there any plan to increase the ceiling, and if yes, by how much and by when?
A. Yes, there is a plan to increase the ceiling. A Cabinet note has been moved to increase it to Rs 10,000. We are even asking for an increase to Rs 15,000 as in the ESI (Employee State Insurance) Scheme. A lot of deliberations have taken place, but again it's a legislative call. We are just the implementing authority. As the head of the EPFO, I feel there is a case for an increase. But I don't know when it will happen.
Q. The Central Board of Trustees recently relaxed the investment norms for EPF funds. Now, you can invest in long-term PSU bonds, besides AAArated private bonds. How much will these allow you to increase returns?
'We are
working in a statutory regime. We need to work in the service regime'
Now, our investments in government of India securities will come down. Investments in state securities may also come down, while investments in public and private sector bonds may go up. Since public and private sector bonds give higher returns, we expect to earn more.
Q. Ever since the New Pension System (NPS) has been opened for all, there has been a comparison between the NPS and the EPF/EPS. Do you think it's fair? How will you compare the two?
A. Our return on an annualised basis in the last four years (May 2009 to May 2013) is better than that of the NPS. We have given 10.47% compared to 9.85% and 9.17% delivered by the NPS' central and state government schemes, respectively. I am happy to report that the EPF is giving better returns. It also enjoys tax benefit on withdrawal, which is not so in the NPS at present.
(According to the EPFO, the NPS indicates cumulative return, while the EPF declares annual returns. Besides, NPS returns are calculated on the basis of the net asset value, which in turn reflects the current market price of the assets being managed. In contrast, EPF accounts its assets on cost price. Therefore, a huge profit on account of the premium price of the assets being held is not reflected in EPF returns.)
Q. How will the pension Bill change the scenario?
A. There are voluntary contributions that may get impacted by the arrival of private pension funds. The EPFO needs to give better service. There were some serious issues regarding EPF services. If we improve our services, as we have started doing, there is no reason why we will not be able to compete with private pension funds even in returns.
Q. The NPS is trying to encourage corporate houses to make their employees join the scheme. It also offers additional tax benefit to employees contributing through their employers. Do you see the NPS as a competition to the EPF?
A. While I won't be able to comment on the tax benefit part, as far as competition from the NPS is concerned, I will take it in a positive manner. What I have been telling our officials is that we must improve our services. We have been doing well, but we are working in a statutory regime. We need to get out of that mindset and work in the service regime.
Q. According to experts, the NPS has an edge over the EPF because it offers equity exposure. Even the finance ministry has given hints that it is okay if the EPF invests in equities. It seems the only resistance is from trade unions. Will EPF funds ever flow into equities?
A. The finance ministry is okay with 5-15% funds in equities. But the Central Board of Trustee (CBT) has put stringent conditions related to companies in which the EPF can invest. That's why very few options are available. Besides, the current scenario is not giving us enough courage to invest in the market.
But I won't say that the EPF will never invest in equities. When our fund size increases further, getting good debt instruments can be a problem. Then, we will be forced to invest in equities. So, I won't say we will never invest in equities.
