LIC PENSION FUND HOLDS 1ST AGM

The first annual general meeting of the board of LIC Pension Fund, which was held in Mumbai on Wednesday, reviewed the progress of the company including regulatory compliance, risk management, corporate governance, progress in business development and internal audit. T. S. Vijayan, chairman of the company, expressed confidence in the strength o0f LIC Pension Fund and visualized a bigger role in the pension market. H Sadhak, CEO, LIC Pension Fund informed that the company has been managing its entire operation fully independently from its own corporate office and complied with all regulatory requirement.

Source: The Financial Express

DELAY IN OPENING PF OFFICE HITS PENSIONERS

Nagercoil: A sub-regional office of the Employees’ Provident Funds Organisation is a long-cherished dream of the provident fund pension account holders of Kanyakumari district. According to sources, after much protracted correspondences by various trade unions, political parties, different members of Parliament and a follow up struggle by the present member of Lok Sabha, A.V. Bellarmine, the EPF organisation accepted the demands of the working class and a year ago on August 28, 2007, when the people of the district were celebrating Onam, a grand function was organised by the EPF organisation at Raja Towers near Ozhuganaserri here to inaugurate a service centre of EPF organisation as a first step towards opening of a sub-regional office.

A host of officers from EPF organisations also attended the programme. The member of the Central Board of EPF trustees, who advocated the sub-regional office at Kanyakumari on behalf of the working mass, was also present on the occasion. The Minister of State for Labour, Oscar Fernandez, who inaugurated the service centre said the centre would be upgraded to a sub-regional office within the short span of the time. The Central Commissioner of EPF in his address announced that the service centre, which started functioning would have the facility of claim processing and within a period of two months, it would have the facility to issue cheques and within a period of one year the office would be converted into a full-fledged sub-regional office. A year later, nothing happened. No facility was provided in the already existing district office except to know status of the claim applications.

Source: The Hindu

EXEMPT FUNDS PLAY SAFE, SETTLE FOR LOWER RETURNS

New Delhi: Here’s an interesting revelation about exempt pension funds: it may not just be the negative attitude of the EPFO board against investment in the capital markets that held them back thus far from such investments. Investment in private sector bonds was permitted for exempt fund, for instance, as far back as 1998-99.

However, they had to carry an investment rating from at least two credit rating agencies. Despite the freedom to invest in bonds of the private sector, exempt funds did not choose to do so and government guaranteed bonds were considered safer. After the closing of the SDS, investments shifted towards securities of state governments and government enterprises.
A majority of exempt fund investment is still held in PSU bonds and central government securities. Exempt and excluded pension funds together account for Rs 110,000 crore; of this, pension sector observers peg exempt funds at Rs 70,000 crore.
Exempt funds have a smaller corpus but are more in number. Excluded funds, on the other hand, may be fewer but are much bigger in size. Company-run excluded funds, which are not EPFO regulated, but are set up with the approval from the resident income tax commissioner, look after all investments and the fund management themselves; also, they are not required to follow the government-mandated investment pattern. These funds have so far been able to pay out reasonable returns to their employees.
In 2006, however, the Finance Bill proposed that unless excluded funds were recognized by the EPFO, they would not be recognized by the IT department. In short, for claiming tax exemptions or benefits, excluded funds would have to be recognized by the EPFO. But the moment they apply for recognition, they become EPFO-governed funds and lose their excluded status. Thus, swelling the EPFO numbers and increasing its deficit.
The investment preferences of exempt funds against the riskier private sector are obvious in the trends of the 1994 and 2003 period. Investment of exempt funds in Central government securities grew from only 11% of the gross investment to as high as 25% in 2003. There was an exponential jump in percentage of investment in this category in 2000, when it went up to 22.5% compared to only 17.8% in the previous year.

Annual reports of the EPFO disclose that investment in state government securities in the same period went up from only 3.5% in 94 to 25.17% in 2001 and then dropped to 21.11% in 2003. The closing down of the Special Deposit Scheme (in which Rs 53,570 crores of EPF funds are deposited) and falling yields of central government securities created problems for these funds, both in the private and public sector,with regard to meeting the declared payout rate to employees as they did for organizations governed by the EPFO.
The percentatge of investments in this category dipped from 85% in 94 to 17.21% in 2003. In tandem, the investment in the PSU bonds went up from 16.99% in 97 to a high 36.79% in 2003.
Consequently, the number of organisations that failed to credit the declared interest rate went up over the period although, overall, those who paid out less than the statutory rate fell. By and large, studies show, exempt funds too managed to credit the declared rate of interest to employees only by dipping into past surpluses. Some India Pension Research Founda tion studies also indicated that some exempt funds invested in junk bonds or those with lower credit ratings to pay out high rates, impacting on their viability Being exempt from the EPFO alone, clearly, has not guaran teed better returns on invest ments. Overall, exempt funds account for 0.8% of the total es tablishments and around 35% plus of the EPF funds. Close to 40% of exempt funds, about 2,600 (2,589 up to March 2007 countrywide out of a total of 471,678 establishments, are concentrated in Maharashtra Karnataka and West Bengal Tax benefits on withdrawal of money from exempt funds are the same as in the case of those under the EPF Act. But the real benefits, in the case of in-house managed funds, are that these are processed much quicker Exempt funds must go through a strict procedure to earn that exemption.

Source: The Economic Times

HSBC TO MANAGE UP TO 33% OF EPFO MONEY

New Delhi: The Employees’ Provident Fund Organisation finalised the fund allocation to the four successful bidders in an order that is inversely proportional to their financial bids. The lowest bidder HSBC will get the highest amount to manage followed by ICICI Prudential AMC and then Reliance Capital AMC and State bank of India.

“We have taken a decision on who will manage which fund and accordingly the funds will be allocated,” said a government official close to the development. The annual incremental accretion amounts approximately to Rs 30,000 crore. It is divided into two funds — the pension money and the provident fund money.

The management has decided to give the full pension money amounting between Rs 9,000 crore and Rs 10,000 crore to HSBC, said the official. ICICI Prudential AMC will get 40 per cent of the balance Rs 20,000 crore in the provident fund and 30 per cent each will go to Reliance Capital AMC and State Bank of India.

The funds will be allocated to the fund houses by September 1, he added.
Earlier, HSBC offered to manage the fund at a fee of 0.0063 per cent followed by ICICI Prudential AMC’s quote of 0.0075 per cent. Reliance Capital and SBI quoted their bids at 0.01 per cent.

Source: Hindustan Times

LONG-TERM REVENUE VISIBILITY SEEN

Bartronics’ Rs 400-crore contract win from the Employees State Insurance Corporation (ESIC) enhances its strong domestic presence; India already contributes over 50 per cent of the company’s revenues.

The size of the contract is approximately 1.5 times its 2007-08 revenues and adds to long-term revenue visibility. Bartronics derives around 45 per cent of its revenues from the smart cards (cards with chips embedded such as credit card, PAN card etc) business and this order will substantially increase this proportion.

The company has its own manufacturing facility to produce smart cards, which was recently enhanced to a capacity of 80 million cards. Such deal wins would mean that the company would be able to achieve near 100 per cent utilisation from 65 per cent levels sooner.

The present contract involves providing smart cards across 609 districts in the country under the Rashtriya Swasthya Bhima Yojna. The revenue inflow is likely to be over several years from this contract.

This deal may pave the way for Bartronics to win more complex and larger projects from the Government, which has proposals to issue national identity smart cards. The company is already doing pilot runs on this project.

Source: The Hindu Business Line

PENSION-LOVING INDIANS ARE HUGE OPPORTUNITY FOR FUNDS

Mumbai: After the trust vote, there has been a lot of attention on the perceived efforts of the government to push critical economic legislation. One of these relates to pensions. There are many players in the financial sector who are hoping to see the legislation being enacted, even if for selfish reasons. A growing number of Indians, especially in the urban areas and bigger towns, thanks to their higher income, are putting their money in mutual funds and other products which have an exposure to equity. Asset management firms, both local and foreign, have no doubt about the market potential here.
Now, a report on the private pension market in India, titled The Sleeping Giant, has thrown up some interesting data. Based on the Invest India Data-works Income and Saving Survey 2007, IIMS Data-works research report says that there are over 8 crore people who do see the need for and value of a pension plan even if it is a contributory system. Current estimates are that about 2 crore people save for their retirement by buying life insurance and other products.
The report suggests is that if the latent demand of this segment of the population is harnessed or tapped, the New Pension System could well have a corpus of Rs 57,000 crore in the first full year of operations. Sounds great but the reality might be different. But, as the report says, even if 20% of the 8 crore people, which it reckons are prime prospects, start saving for their retirement, the money which pension providers could have access to will be substantial.
Indeed, it has been demonstrated in some states how some organisations and self-help groups have managed to convert a growing number of daily wage earners to set aside modest sums for old age security.
The IIMS report says that as part of its survey, it sought out information from respondents on their retirement intentions and expectations, besides savings objectives. The survey showed that less than one in 14 people is making a conscious effort to save for retirement. Much of it has to do with low earning capacity. However, with robust economic growth, average earnings have risen and taking into account the change in demographics, the pool of funds which could be available for pension savings will be large.
If the survey is a guide to go by, policy makers will be able to draw comfort from the findings. The majority of those covered under the survey have said that they are willing to accept the fact that they have to save for a decade or more, even if it means small sums every month. Nor are they balking at the thought of not being able to take out money before the age of 58. The survey in fact, estimates that of the 8 crore workers in the paid workforce, one in four workers is ready to save for retirement and sign on for a voluntary pension plan. That should certainly bring some cheer to the pension regulator, PFRDA.
There is a lot of ground that the report covers. For instance, state-wise distribution of latent demand for retirement savings schemes. Demand is pronounced in states such as Andhra Pradesh, Maharashtra and Uttar Pradesh where it believes a targeted approach could well work. The resistance to investing in securities is also low compared to other assets, the report says. The other positives which have emerged from the survey is the fact that 70% of those falling in the latent demand category for retirement products do have a banking account or save with the post office.
Of critical importance now would be the approach of policy makers towards this universe of investors. Obviously, product design would be a key determinant. So would be the regulatory structure, the ease of investment, type of products and distribution channels, among others. The PFRDA is putting in place structures which seek to address all these. It is also clear that those aspiring to tap the potential investible surplus would need to unveil effective campaigns to woo savers. And that is not marketing campaigns alone but financial literacy programmes. The pensions regulator for one is considering doing that. Others who have a long term stake in the market need to follow suit.

Source: The Economic Times

MINISTRY HOPES TO MAKE PF AVAILABLE FOR ALL CITIZENS

Even as the finance minister plans to reach out to all parties and seek their support for the Pension Bill, his ministry is considering a proposal to throw open schemes floated by the public sector fund managers for government employees to all private citizens. According to government officials, the PFRDA had sought legal opinion from its advocate on the issue. “Legally, it does not pose any problems,” said PFRDA chairman D Swarup. Workers in the unorganised sector will be the biggest beneficiaries since they do not have any social security mechanism now. A finance ministry official, however, said such schemes generally become successful if backed by statute. “Ideally, the government would like to make pension funds available to all private citizens by getting the Bill passed at the earliest.”

Source: The Indian Express

FINMIN MAKES COMPROMISES TO ENSURE PASSAGE OF PENSION BILL

New Delhi: Aware of the precarious balance the UPA finds itself in Parliament and to ensure that pension reforms receive all party support, the finance ministry has compromised on four significant aspects of the Pension Fund Regulatory and Development Authority (PFRDA) Bill.

According to government officials, the finance ministry has decided to include the 26 per cent cap on foreign direct investment (FDI) in pension funds in the main Bill. This is similar to the legislation in the insurance sector that specifies the cap in the Insurance Act itself. Earlier, the ministry had proposed to relegate the FDI provision in the regulations, thus obviating the need to go back to Parliament for hiking the limit.

The second major change relates to providing subscribers the option to invest their pension fund contributions entirely in debt, making it a risk-free avenue. This has also been included in the Bill. This was done based on the recommendations of the Parliamentary Standing Committee on Finance to placate Left parties that were completely opposed to the Bill. The investment options were earlier supposed to be part of rules and regulations to be framed by the regulator once the legislation was enacted.

In allowing pension funds to invest 15 per cent of their corpus in equity (5 per cent directly in stocks and 10 per cent in equity-based mutual funds), the ministry had earlier not specified if overseas investments were allowed. Now, in an effort to find all round support, including from the Left, the ministry has proposed in the Bill that funds would not invest the corpus abroad.

The last issue relates to the choice of funds to manage the contributions of government employees who joined service after January 1, 2004. The Bill, to be introduced in the next session of Parliament, specifically says that there should be at least one public sector fund manager among the various fund managers to be appointed by the regulator. Source: Indian Express

PF’S BITTERSWEET MONTH

It’s been a bittersweet month for the Employee Provident Fund Organisation (EPFO). On one hand it held a spectacularly successful competitive bidding for fund management that gives them good names at an unbeatable price of 0.01% of assets. On the other hand the amendment to include employers with more than ten employees (the previous limit was twenty) under PF coverage represents a tragic triumph of hope over experience and has the potential to fatally undermine EPFO’s already questionable financial sustainability.

Let’s talk about the fund management issue first. Upset with its earlier fund manager, the EFPO put up the management of its fund for competitive auction. Given tight investment guidelines (mostly sovereign but some corporate debt), fund managers quoted various fees but the final four will be paid 1/100th of 1% of incremental assets. This is a bargain and has huge implications for the proposed national pension scheme (NPS). There is much unfinished agenda (individual account asset allocation flexibility, linking and capping the employee interest credit to earnings, etc) but the auction and free choice of fund managers (unlike earlier unstated restrictions on private managers) represent policy innovation and change at its best for which the EPFO and its leadership must receive credit.

But if the decision to end the earlier fund manager monopoly will revolutionise fund management, why not apply this magic of competition to the overall cost of administration? All employers that pay their contributions into the EPFO are required to pay separate administrative fees for 1.16% of salary. This amounts to 4.64% of contributions i.e. 464 basis points. Is the cost of administration really 464 times cost of fund management? Employers that manage their own trusts are required to pay 0.18% of salary as “inspection charges”.

This amounts to 0.72% of contributions i.e. 72 basis points. Does mere inspection really cost 72 times fund management? As the fund manager auction has shown, the important question is not public or private but competition versus monopoly. Why not allow the record keeping agency for NPS i.e. NSDL to bid for EPFO administration? Better still, why not give employers a choice to pay their PF contribution to the individual anchored NPS? A benefits plan like EPFO that is anchored to employers (rather than employees) has not kept up with the morphing of the “mai baap relationship” to the current “taxicab transaction”. Organising record keeping for benefits like EPFO, ESI, EPS, EDLI, etc by employees (backpack benefits) rather than employer greatly increases portability.

The fund manager triumph notwithstanding, EPFO’s future may be doomed by the decision to increase coverage to organisations with more than 10 employees. Samuel Johnson once described second marriage as the triumph of hope over experience. While second marriages have limited downside, this toxic decision flies in the face of experience since EPFO covers less than half of its current mandate and will: a) amplify unorganised employment, and b) explode the contingent pension liability of the government.

This decision represents the death knell for attempts to increase organised employment. EPFO participation requires employees to save 24% of their salary while the IIMS Dataworks annual survey of the Invest India foundation points out that 25% of those employed in 10-19 employee firms save only 9%. Forced savings of this magnitude at lower salary levels are impossible and force informalisation. This decision represents a fundamental misunderstanding by policy makers of the Cost-to-Company (CTC) world; benefits come out of salary and are not over and above it. I guess this arises from the way government bureaucrats are paid where benefits are not monetised. I’m not even factoring in questions about EPFO’s ability to handle higher volumes without sinking already questionable service. Nobody should be surprised if unorganised employment accelerates.

Not many Provident Fund members realise that 8.33% of their salary is diverted to a defined benefit plan called the Employee Pension Scheme. The last actuarial valuation four years ago calculated the scheme deficit at Rs 22,000 crore. This liability was increasing rapidly with nothing done; it will now exponentially increase with the new members. I bet this hole will be larger than the erstwhile UTI unless benefits are reduced.

History shows that defined benefit plans are dangerous things to fool around with. In the 1950s, GM made pension promises it could not keep and trade unions knew this; union leader Walter Reuther urged auto makers to “go down to Washington and fight with us” for government pensions. In 1961, GM got away with a wage increase of 2.5% in exchange for a 12% rise in pensions. GM recently acknowledged that in the 15 years to 2007 it spent $103 billion on its legacy pensions and healthcare (versus only $13 billion in shareholder dividends). Financial markets are betting on GM declaring bankruptcy if only to dump pension liabilities onto the government operated Pension Benefit Guarantee Corporation.

EPFO, like GM, has been living beyond its means for the last few years because of regulatory capture by the left. The decision to expand coverage is delusional, akin to trying to treat obesity by mandating small sizes, and may be the beginning of the end of EPFO as we know it.

Source: The Financial Express

ANOTHER JUDGE REFUSES TO HEAR PF SCAM CASE

New Delhi: The Supreme Court, hearing a petition against sitting and retired High Court and District Judges, said to be involved in a Rs 26 crore provident fund scam in Ghaziabad, witnessed an unruly scene on Thursday with Justice BN Agrawal being the second judge in a span of ten days who refused to hear the case being upset over comments by senior advocate Shanti Bhushan.

On July 30, Chief Justice KG Balakrishnan had refused to hear the case any further after Bhushan challenged an administrative order given by the Chief Justice instructing the SSP of Uttar Pradesh police to send its queries of what was sought to be asked from the judges. Bhushan, who argued on behalf of NGO Transparency International criticised that such a practice was 'unheard of' and sought to challenge its correctness, forcing the Chief Justice to constitute another bench headed by Justice BN Agrawal, the second senior-most judge.

The argument commenced on August 1 before a three-judge bench headed by Justice Agrawal and proceeded for two and a half days. On Thursday, Bhushan commenced arguments by stating that the orders passed by the court give an impression that 'this court is giving protection to corrupt judicial officers.' The Bench warned him to refrain from making such 'contemptuous' remarks. Bhushan, however, refused to apologise stating he accepted to be hauled for contempt instead.

The matter then proceeded when he decided to withdraw his comment and proceeded with the arguments in the case. The hearing was marred by intermittent stops caused by disagreement on the arguments made from the Bench. At one point, when Bhushan sought to explain the power of the police to arrest being restricted, Justice Agrawal took umbrage and said, "We don't know how you being an eminent lawyer of this country is arguing in this manner" and later compared his arguments to that of a 'street urchin'.

The argument before the court was on the crucial aspect of which investigating agency, whether the CBI or the state police are well-equipped to handle a scandal of this huge dimension involving judges. But the argument went on a different tangent, as the nitty-gritty of criminal investigation became the subject of debate.

Things were under control till Prashant Bhushan got up and charged the Bench of pushing his father against the wall. Enraged by the Court's quizzing his father, Prashant said, "You are again and again putting words in the mouth of the senior counsel."

This added the necessary spark with both the judge and the lawyer crossing swords. Alarmed by the backlash, the Bench remarked, "What business has Shanti Bhushan to shout at judges. He has conducted professional misconduct. We would have initiated contempt proceedings, but we wont do it out of respect for the senior counsel." Ruing the precedent set by him, the judge said, "The way in which Bar is behaving we are sorry. You are only here to abuse the judiciary. If this is the state of affairs, we cannot hear the case."

Source: The Pioneer

PVT PFs MAY HAVE TO HIRE FINANCE GURUS

New Delhi: Private provident funds, superannuation funds and gratuity funds that manage employee savings of many a corporate house may soon have to appoint an asset management company (AMC) or investment advisor to ensure that they deploy the money efficiently.
The finance ministry is “seriously looking at” a proposal to make it compulsory for such trusts to hire such advisors. Guidelines in this regard would soon be issued, a senior government official, who did not wish to be named, said on Tuesday.
Incidentally, the finance ministry had, in September 2007, issued draft rules on the proposed investment pattern for such trusts. The plan sought to let them invest in the capital market more and less in the securities of central and state governments. The ministry suggested doubling their capital market exposure from 5% and cutting their spread in government securities from 40% to 35%. The final norms are likely soon, he said.
The rules will be applicable to trusts managing funds above a threshold, say Rs 50 crore, which is yet to be finalised. At present, there is no centralised data available on the size of the funds managed by such trusts registered with different state authorities. The government has started collecting data and the process would be completed soon, the official added.
“In these trusts, investment decisions are made by people who are not essentially professionals. These decisions make a difference in the financial health of a lot of people who are in their twilight years. Such decisions have a direct bearing on the livelihood of these people. The government is seriously looking at the proposal,” the official said.
The finance ministry is also spearheading a major change in the way financial markets are regulated to make the regulatory regime in sync with vibrant market dynamics, the official said. For this, the ministry will first push for a regulatory audit that would take stock of the result of various regulatory decisions after a reasonable period.

Source: The Economic Times

PFRDA TO ROLL OUT CUSTOMER AWARENESS PROGRAMME

With the pension sector expected to open up soon, the Pension Fund Regulatory and Development Authority (PFRDA) is gearing up to educate potential subscribers about the need for retirement planning by developing a customer awareness programme. “We are appointing an expert committee to draw up a blueprint for financial literacy,” Meena Chaturvedi, executive director PFRDA said at the Financial Planning Congress on Tuesday. The PFRDA hopes to roll it out in the next six months, she added.

The programme would work at two levels - first, to increase awareness about the New Pension Scheme (NPS) and to expand its subscriber base; and also to educate customers about various pension products being offered by the pension fund managers.

Source: The Financial Express

PENSION BODY MAY GET NOD

New Delhi: The pension reforms bill to set up a regulator and give more freedom to subscribers for investing their retirement money is likely to be tabled in the monsoon session of Parliament, the finance ministry sources said on Tuesday. "Amendments are ready. Hopefully, it would be tabled in the upcoming monsoon session of the Parliament," sources said. The Pension Fund Regulatory and Development Authority Bill (PFRDA) was introduced by the finance minister, Mr P. Chidambaram, way back in 2005 to replace the ordinance promulgated in 2004 for setting up the regulator.

The bill was referred to the Parliamentary Standing Committee after the Left parties opposed the legislation. The standing committee recommended the bill with some modifications. But the amended bill could not be tabled in Parliament due to persistent opposition from the Left. Pension reforms bill will give more freedom to subscribers to invest their retirement money and invite more players in the sector. After the Left exited as the supporting front to the ruling coalition and the government won the trust vote with support of its new allies, hopes have arisen that the PFRDA Bill along with other reform legislations would be tabled in the Parliament.

Two other bills relate to raising of the FDI cap from present 26 per cent to 49 per cent in the insurance sector, and lifting of the voting cap in the private sector banks. The finance minister had recently stated that he would seek support to reforms bills from even those who had voted against the government in the confidence motion. The government had appointed Ms D. Swarup as the interim pension regulator, PFRDA, way back in 2003.

The Centre has implemented new pension system (NPS) for its employees who have joined the government services since January one, 2004, which is now known as interim pension reforms. Under the NPS, the employee has to contribute to his pension fund, matched by employer (in this case, the government). Under the old pension system, pensioners have assured benefits, but under NPS, they have defined contribution. Most states, barring Left-ruled West Bengal, Kerala and Tripura, have also joined NPS, under which employees have been now given freedom to opt for parking five per cent of its funds in the stock market

Source: Deccan Chronicle, The Times of India, The Financial Express, Asian Age

MINISTER FOR INCREASING SDS INTEREST RATE

New Delhi: Union Minister of State for Labour and Employment Oscar Fernandes will ask the Finance Ministry to raise the rate of interest on the Special Deposit Scheme (SDS) to provide higher returns to the provident fund subscribers.

A bulk of the provident fund money is invested in the SDS at an interest rate of 8.5 per cent per annum. Talking to reporters on the sidelines of a function here on Tuesday, Mr. Fernandes said that he would make a representation before the Prime Minister and the Finance Minister in this regard.

Nearly 80 per cent of the retirement money of Employees Provident Fund of over four crore subscribers are parked in SDS. Denying that the government would investment the EPF money in stock market, he said there was a laid down policy on investment of the money. “We can only invest in government securities, State government securities and the public sector. We cannot invest in anything else,” he said.

Source: The Hindu

DECISION ON WHO MANAGES PROVIDENT FUND DEPOSITS

New Delhi: After two private fund managers, ICICI Prudential and HSBC Asset Management Company (AMC), emerged as front-runners to manage Rs 25,000-crore incremental deposits of Employees Provident Fund, a final decision on their fate will be taken on Tuesday by the apex decision-making body on the matter — the EPFO’s Central Board of Trustees.

The Board, chaired by labour and employment minister Oscar Fernandes, will meet on Tuesday to take a final call on recommendations of the EPFO’s Finance and Investment Committee. The committee, in its meeting held last week, had given nod to the pruned list of two private fund managers and a public fund manager, State Bank of India from among the seven private and three public fund managers that had qualified technical bids.

Meanwhile, legal opinion on eligibility of Asset Management Companies or other financial institutions in addition to banks as portfolio managers was sought from the labour and employment ministry. The opinion, which contained certain ambiguity, however, was put aside by Central Provident Fund Commissioner, A Viswanathan, stating that management and deposits or investment of EPFO funds are two different activities. Therefore, portfolio management by AMCs can be made as long as they channelized these investments in the name of the CBT and EPFO within specified guidelines.

However, the proposal is likely to be debated hotly within the board, with employees’ representatives, comprising of leading trade union organisations, opposed to private participation in the fund management.

Earlier, independent consultant, Crisil had been appointed by a three-member committee to assist EPFO in selection of multiple fund managers. Crisil has also been given the mandate to establish an Investment Monitoring Cell and help authorities in monitoring the performance of chosen fund managers for a specified period. Later, EPFO would be expected to build in-house competence for monitoring these fund managers’ performance.

Source: The Indian Express

MEET TODAY TO DECIDE ON EPFO FUND MANAGERS

New Delhi: Efforts by two private sector asset management companies – HDFC AMC and Birla Sun Life AMC – to provide fund manager services gratis for the Employees Provident Fund Organisation (EPFO) and pay certain statutory expenses on behalf of it have been rejected by EPFO’s finance and investment committee.

The EPFO has rejected the proposals made by the two companies based on the opinion of its external legal advisors. The private sector players suggested this strategy to garner a portion of the EPFO corpus (about Rs 1.4 lakh crore) under their management. There were a total of 10 qualified bidders in the fray for becoming EPFO fund managers.

The finance and investment committee, however, has recommended HSBC AMC and ICICI Prudential AMC as fund managers along with the present fund manager -- State Bank of India.

The Central Board of Trustees (CBT) of the EPFO will meet on Tuesday to take a final call on the matter. One of the CBT members, who is also a member of the finance and investment committee, told Business Line that HDFC AMC and Birla Sun Life had made the gratis offer to derive “goodwill” as fund managers of the second largest financial institution in the country after Life Insurance Corporation. This, they felt, would enable them to generate enough business to make good the losses that would be incurred for providing free services to the EPFO.

“The two companies had said that though they would charge no fee as direct consideration for the services to EPFO, but hoped to get compensated in terms of enhanced reputation and brand value,” a CBT member said, adding that the companies had quoted zero rates despite knowing that charges related to custodial services, which are to be borne by the fund managers only, are to be included in their fees. “This is an offer unheard of,” he said.

EPFO’s legal advisors have recommended rejection of the zero rate proposals stating that they are not legally enforceable. The legal advisors state that creation of goodwill cannot be considered as a consideration as it is intangible and uncertain in nature.

“As an agreement without consideration is not a valid contract, hence the defect/infirmity in the contract cannot be cured by relying on the performance guarantee,” they explained while recommending rejection of the proposals.

Source: The Hindu Business Line, The Financial Express

NOW, ALL PSU BANKS MAY GET TO TAKE EPF DEPOSITSIshta Vohra

New Delhi: Public sector major State Bank of India (SBI) is set to lose its monopoly as the only bank where provident fund receipts of over four crore subscribers are deposited. The EPFO establishment is understood to have mooted the possibility of expanding the network by including all other nationalised banks as deposit points. Speaking to the ET, Central Provident Fund Commissioner (CPFC) A Vishwanathan said the proposal to this effect has been mooted and “all nationalised banks have been approached for the same and a response is awaited.” The move is expected to address two key issues: Firstly, it would ensure faster clearance of PF remittances by banks. This would help depositors to start earning interest on their deposits sooner than before. Secondly, higher number of deposit points means increased accommodation of an additional 45 lakh-plus new subscribers expected to come under the ambit of EPF Act shortly. This follows the recent move by the central board of trustees (CBT), according to which, PF provisions will now be applicable to all establishments with 10 or more employees . The EPF Act was till now applicable only to establishments that employed 20 or more employees but the CBT, at its last meeting earlier this month, approved necessary changes in a concerted bid to bolster the EPFO’s sagging finances, thanks to increasingly lower returns on investments. The decision comes in tandem with the EPFO’s finance and investment committee (F&IC ) that on July 25 shortlisted three asset management companies — HSBC, ICICI Prudential and SBI — in the financial round (out of 15) to manage its yearly incremental deposit of over Rs 25,000 crore. “The process of clearing PF remittances and crediting them to the EPFO account will be much speedier than at present for subscribers. Currently, it can take as much as three days or even longer in the event the subscriber/employer does not maintain an account with SBI,” the CPFC pointed out. That delay has proved very costly for the EPF and its finances in the past several decades, as (F&IC ) discovered last year, after an auditor submitted his report on charges of mismanagement of funds by SBI to it. The auditor had cleared SBI of several charges that led to an yield of only 8.25% on the EPF’s investments in 2007-08 compared to the higher yields that even small investors were earning. Bulk deposits by corporate houses in the fixed income market, too, earned rates ranging from 10.5% and 13% for short maturities. The EPFO paid out 8.5% rate to its subscribers despite the poor earnings on investments for the year, leading to a deficit of Rs 263.78 crore. F&IC , which later complained formally to the Institute of Chartered Accountants of India (ICAI) against the auditor’s report, had alleged that SBI had let EPF funds, as much as Rs 150 crore at times on a day to day basis, lie idle in its branches for several days, denying appropriate returns. F&IC’s request of a day to day interest on the funds was turned down by SBI, citing RBI rules. The committee also charged that SBI had deliberately parked a good chunk of EPF funds in the bank’s own low yielding term deposits, ensuring that the EPFO’s returns were low even while the bank advantaged itself. “We hope to see a rise in our subscriber base soon, now that the CBT has approved changes in the EPF law that will bring establishments with 10 or more workers under its ambit. The larger collection base for retirement funds means that its management, and that includes collection, has to be better than it is now,” CPFC Vishwanathan said.

Source: The Economic Times

NOW, ALL PSU BANKS MAY GET TO TAKE EPF DEPOSITSIshta Vohra

New Delhi: Public sector major State Bank of India (SBI) is set to lose its monopoly as the only bank where provident fund receipts of over four crore subscribers are deposited. The EPFO establishment is understood to have mooted the possibility of expanding the network by including all other nationalised banks as deposit points. Speaking to the ET, Central Provident Fund Commissioner (CPFC) A Vishwanathan said the proposal to this effect has been mooted and “all nationalised banks have been approached for the same and a response is awaited.” The move is expected to address two key issues: Firstly, it would ensure faster clearance of PF remittances by banks. This would help depositors to start earning interest on their deposits sooner than before. Secondly, higher number of deposit points means increased accommodation of an additional 45 lakh-plus new subscribers expected to come under the ambit of EPF Act shortly. This follows the recent move by the central board of trustees (CBT), according to which, PF provisions will now be applicable to all establishments with 10 or more employees . The EPF Act was till now applicable only to establishments that employed 20 or more employees but the CBT, at its last meeting earlier this month, approved necessary changes in a concerted bid to bolster the EPFO’s sagging finances, thanks to increasingly lower returns on investments. The decision comes in tandem with the EPFO’s finance and investment committee (F&IC ) that on July 25 shortlisted three asset management companies — HSBC, ICICI Prudential and SBI — in the financial round (out of 15) to manage its yearly incremental deposit of over Rs 25,000 crore. “The process of clearing PF remittances and crediting them to the EPFO account will be much speedier than at present for subscribers. Currently, it can take as much as three days or even longer in the event the subscriber/employer does not maintain an account with SBI,” the CPFC pointed out. That delay has proved very costly for the EPF and its finances in the past several decades, as (F&IC ) discovered last year, after an auditor submitted his report on charges of mismanagement of funds by SBI to it. The auditor had cleared SBI of several charges that led to an yield of only 8.25% on the EPF’s investments in 2007-08 compared to the higher yields that even small investors were earning. Bulk deposits by corporate houses in the fixed income market, too, earned rates ranging from 10.5% and 13% for short maturities. The EPFO paid out 8.5% rate to its subscribers despite the poor earnings on investments for the year, leading to a deficit of Rs 263.78 crore. F&IC , which later complained formally to the Institute of Chartered Accountants of India (ICAI) against the auditor’s report, had alleged that SBI had let EPF funds, as much as Rs 150 crore at times on a day to day basis, lie idle in its branches for several days, denying appropriate returns. F&IC’s request of a day to day interest on the funds was turned down by SBI, citing RBI rules. The committee also charged that SBI had deliberately parked a good chunk of EPF funds in the bank’s own low yielding term deposits, ensuring that the EPFO’s returns were low even while the bank advantaged itself. “We hope to see a rise in our subscriber base soon, now that the CBT has approved changes in the EPF law that will bring establishments with 10 or more workers under its ambit. The larger collection base for retirement funds means that its management, and that includes collection, has to be better than it is now,” CPFC Vishwanathan said.

Source: The Economic Times

RING IN NEW PENSION SCHEME

After winning the trust vote, finance minister P Chidambaram had said the government would push ahead with financial sector reforms. Presumably, this would include key economic legislation encompassing insurance and pensions. On the PFRDA Bill, the government has covered a lot of ground having incorporated some suggestions put forward by a parliamentary committee.

That should address the concerns of lawmakers. Yet, there are issues that must be addressed or at least debated before the legislation is approved. All subscribers to the New Pension Scheme, now mandatory for central government employees who joined service on or after January 1, 2004, have to reckon with a differential tax treatment. In the current tax regime, while contributions to the pensions scheme and earnings are tax exempt, the proceeds are taxed at the applicable personal income tax rate. In vogue in many other mature economies, this is also in line with the exempt exempt tax (EET) method advocated by an expert committee.
This may be a desirable approach. But it overlooks some facts. Comparable long-term social security schemes such as the Employees Provident Fund, Public Provident Fund and the General Provident Fund enjoy a beneficial tax treatment — contribution, earnings and maturity proceeds are tax exempt. It seems discriminatory as it is skewed in favour of the organised sector.

The NPS is designed to bring into its fold not just government staff but lakhs of workers including the self-employed. While providing retirement incomes to a large section of the population is the goal of the scheme, there is the promise of savings flows, which once the NPS gains traction, could fuel the capital needs of industry and infrastructure providers.

It is well known tax treatment drives the behaviour of investors and other financial product providers. In an environment where stocks held for just one year are exempt from long-term capital gains tax, it would be harsh to penalise those trying to build an egg nest. The government has two choices: ensure parity of tax treatment for all long-term social security schemes, or introduce EET across savings products.

Source: The Economic Times

EPF HAS TO EXPAND COVER FOR COUNTRY’S SOCIAL SECURITY; NO CHANGE SEEN IN INTEREST RATE

New Delhi: The employees’ provident fund, or EPF, a savings plan under which employees contribute 12% of their basic salary and the employer contributes an equal amount to a government-administered fund that is paid out either on retirement or disability of an employee, is restricted to establishments with 20 employees and more. Recently, the Union government proposed that the benefits of EPF be extended even to establishments employing 10 persons, and to all industries in the country.

According to the National Sample Survey Organisation, a government body that conducts social and economic surveys, 44.35 million enterprises employ 79.71 million workers in the so-called unorganized sector. In its existing form, as of March 2006, the EPF scheme extends to 441,000 establishments.

Mint spoke recently to A. Viswanathan, central provident fund commissioner of the Employees’ Provident Fund Organisation, or EPFO, on this and a range of issues associated with the administration of the fund. Edited excerpts:

Where does the current decision to expand EPF coverage to firms with 10 or more employees flow from?

It (the decision) is not a sudden one. It has been on the cards for a long time. The second National Commission on Labour (2004) said we have to give security to every individual. How do you do it? Instead of expanding coverage to firms with 10 or more, or five or more and so on, they asked us to extend social security to everyone. Today, luckily we are in a stage called demographic boom. But along with a boom we have a huge lurking liability. In 30-40 years all these youngsters will become old.

What is the income support they are going to have?

The family structure is not going to stay like this. Family support which has been the backbone of Indian society for so long will break up. Due to urbanization there is strain on the family structure. EPF has to expand its coverage, otherwise society will have a problem.

The recommendation (to expand coverage) was made six years ago. EPFO itself had made this recommendation in 2003. The same board had also approved this. But it came with a rider to ensure no difficulties are caused to the workers or management, because the smaller the establishment, you have to take a lot of care to reach them for the purpose of coverage, registration, enrolment and service delivery.

How do you do that?

When this recommendation was sent to the government, they decided that the time was not right. At this time, the unorganized sector workers’ Bill has come. The Bill takes care of establishments with up to nine workers.

So, establishments with 10-19 workers will be left out. So, we thought we must cover this so that the entire population comes under a certain sustainable social security model.
A number of employers were op posing this move.

Would you like to elaborate?

No one opposed it as such.
Employers’ representatives were also of the view that social security must be provided to all. Their fear is, smaller the establishment, the employer becomes the accountant, salesman, he is everything.

They were averse to adding one more administrative burden. Their concern was how to make things simpler, make it Web-enabled or something. It was more to do with processes, the process of registration, giving benefits, etc.

Will the interest rate (on EPF) be reduced to 8.25%?

The board has not taken any such decision; 8.5% can be easily sustained. Estimates are made at the start of the year based on certain assumptions. We always make a very conservative estimate on the interest rate so that we don’t make any overdraw. We would like to sustain 8.5%. In the year 2008-09, I have no means of increasing the interest rate. Maybe at the end of this year, I would be able to say.

There was a request in the CBT (central board of trustees) that the board members must meet the Prime Minister for enhancing the interest rate and to express their views on the same. You might be able to increase rates after March 2009? Even at 8.5%, you seem to have a shortfall of about Rs139 crore.

A clear picture will emerge only later. Maybe there will be no shortfall, because, interest rates have gone up now. All that has to be factored in. As per a calculation I made a couple of months ago, I might be able to maintain 8.4% without any shortfall. We might even get 1% extra. We normally fix the interest rate well before the beginning of the financial year so that any person leaving in the middle will also get a proper rate of interest. We have not been able to do it this year or the previous year also. But when we do the arithmetic later, maybe it will be possible to give a better rate. We may be able to give 8.5% without shortfall.

So 8.5% is a good rate of interest in your opinion?

(Laughs) Yes, I am giving 8.5%, which is tax-free. Secondly, in case the employer does not pay, I am underwriting the money. The big picture is pension. To get some assured money is the greatest security.

If a person is getting more by way of interest money in banks, why would they want to continue con tributing to EPF?

Two reasons. First is that contribution made to EPF is completely tax-exempt. If you put your money in a bank deposit, you are going to be taxed. Second, today the bank rate is high, but two-three years ago what was happening? People were withdrawing because bank rates were low.

In case you are making your own investments, there is an element of risk and administrative cost. EPF can spread its risks. So, there are many good reasons why EPF is good.

Are you thinking of changing the investment mix of your fund since given the current inflation trend, returns are not that great?

We are making investments as per the mandate given by the board and investment pattern approved by the government. It will not allow me to take any risk. It is their call and wisdom. The board has decided that most money will be in bonds, including those issued by the private sector. The board has refrained from investing in equity.

This is an election year, any pres sures to increase interest rate?

No, nothing of that sort.
Even if the board decides to give 15%, the government will act as a check as it is mandated to ensure that there is no overdrawal. There was a demand to set up an EPF-like fund for enabling the Un organized Sector Workers’ Social Security Bill. But the government rejected it.

Would you like to comment?

EPF was designed keeping in mind people are going to stay in one job all their life. That they were all stable persons. What you call permanent employees. But the world has changed. Labour practices have changed. We have to change along with times but we have not done it in a very efficient manner. Until we do that, keeping a track of a large number of people is creating tremendous pressure on us.

Is the pension fund slowly collapsing? What is being done about it?

Yes, pension fund is under certain strain. If the fund is closed today, then we will have to keep paying out current members until they die. So, actuaries are saying that in 60 years, if we close the fund now, we will have a shortfall of Rs22,000 crore. The crisis is not immediate. We have already initiated certain measures to reduce the strain, and we will continue to do it. Already, a panel set up by the labour ministry is reviewing this whole scheme to suggest measures to improve it.




Source: For Mint, Krishna Urthy Ramasubu