EPF CANNOT PERENNIALLY OVERLOOK BAD FUND MANAGEMENT

New Delhi: In June, State Bank of India was put in the dock by the country’s biggest retirement fund, the Employees Provident Fund Organisation (EPFO), for poor management of the funds. The Finance and Investment Committee (FIC) of the EPF’s central board of trustees junked an audit report that cleared SBI of allegations of mismanagement of funds, which caused abysmal returns on EPF investments and subsequently complained to the Institute of Chartered Accountants of India (ICAI) for action against the auditor. The institute is yet to give its verdict.

FIC charges included deliberate parking of substantial EPF funds in SBI’s own term deposits, leading to lower returns. It also alleged that monthly PF contributions remitted to SBI branches idled for a while before being credited to EPF investment account and that SBI had failed to disclose this or share returns on these funds which were being used to service bank operations. One FIC member estimated that as much as Rs 150 crore could be lying supine with SBI on a day to day basis.

In reply to the FIC demand that interest be paid to it on daily running balances, SBI offered to pay interest to EPF on a monthly basis, citing RBI guidelines that prevented it from paying monthly interest. That virtually amounts to nothing since interest is calculated at the end of the month by which time the idling funds have been moved.

The matter is, therefore, grave enough for EPF, whose corpus is a colossal Rs 2,40,000 crore (but has fetched nothing more than 8% returns on its investments in the recent past despite rising interest rates) to act fast on its decision earlier this year to engage multiple fund managers, even if limited by the current investment pattern, and rid SBI of its five decade long monopoly. HDFC, ICICI Prudential and UTI asset management companies were among those who eagerly bid for the same. EPF’s central board of trustees is expected to take a call on the bids when it meets later this year.

EPF had to dip into various contingency funds and its Interest Suspense Account to pay 8.5% interest rate to its existing four crore-plus subscribers in both 2006-07 and 2007-08. Although it was becoming increasing clear over the last few years (subscriber payout percentage went down from as high as 12% to only 9%, thanks to lower returns on investments) that the central board of trustees has to do something urgently to ensure a reasonably high level of payout to subscribers, measures to address this were restricted to drastically reducing the number of defaults through higher penalties and sterner legal action. Not surprisingly, they were not enough to stop the central board of trustees from being forced to dip into contingency and reserve funds accumulated over several decades, depleting them systematically in the absence of any bailout packages from the government.

SBI’s ‘sitting pretty’ tactics have been successfully challenged in the recent past by public sector giants such as food procurement major FCI. By questioning the prolonged double digit interest rates charged for food credit by the SBI-led consortium despite prevailing lower interest regime, FCI saved a substantial expenditure on the food subsidy bill. FCI managed this by the simple
precedent of shopping around for alternative funds in an eager market, thus forcing the leading bank’s options.

Interestingly, it was the central board of trustees itself that suggested, in 2005, a more relaxed investment pattern, albeit not linked to the capital market, to the finance ministry. In December last year, the central board of trustees declined to okay the proposal for investment of a symbolic percentage of its corpus in the capital market, within the prescribed limits of the investment. Instead of equities, it proposed investment in safer post office term deposits and NSS, both of which were rejected by the finance ministry.

This year, to bolster its sagging coffers and poor returns from mismanagement of investments, EPF has amended its rules to bring 45 lakh more subscribers under its ambit. It is also expected to soon hike the salary ceiling on par with ESIC to boost the quantum of contributions to its kitty. Whether the higher interest rates this year will mean better returns on current investments, and to what extent, will only be known by the end of the fiscal but EPF cannot ignore the urgent signs for reform in investment management for optimum returns. Options appear limited even when multiple fund managers are appointed.

”Fundamental investment pattern changes are essential to realise optimum returns but there is enough leeway on investment in existing pattern which the central board of trustees has failed to maximise. In similar situations, in other emerging economies where capital market investment options are deliberately restricted, both transparency and performance are taken into account for assessing the services of fund managers,” said an official.

A 2004 study the India Pension Research Foundation’s R Sane and N Harishankar maintains that contracting out of the EPFO in principle would indeed provide a great deal of flexibility to employers to constitute and administer provident and pension funds for employees despite EPFO initiatives for reform which could lead to exempt funds. As per the study, there is still considerable lack of information on the functioning of exempt funds that has meant less knowledge about the portfolio distribution of exempt funds and the credit ratings of the instruments held by them. The investment regime prescribed is “highly restrictive” the authors maintain, with exempt funds finding it difficult to keep up to the mandated interest rates with such regulation. There has to be flexibility in either one or the other: either interest payout rate or regulations, the study says. Studying their portfolio distribution in detail could help the EPFO in getting an estimate of the viability of exempt funds and strengthening its own yields on investments.

As for the New Pension Scheme (NPS), which is comparable, the target is to have a corpus of $300 billion in another 10 years (the current corpus is a little over Rs 2,000 crore and it is largely lying uninvested in the public account). While secure and riskborne investment options are being mulled to start with, the fact is that if these extant corpus had been parked in the capital markets in the last four years instead of in public account, returns would have been 14-29%. How well the NPS fund managers performed would be clear by mid next year but by incorporating transparency and performance-oriented rating for fund managers as priority criteria for investment of pension funds, the NPS subscribers may well manage to get far better returns on investments than the EPF subscribers.

Source: Prabha Jagannathan
The Economic Times