Inflation, high-price credit, and how your EPFO may end up footing the bill

With interest rates climbing and the government placing the management of EPFO funds largely in private hands, the provident fund scheme could become a less attractive savings option

What has the increase in interest rates, announced on Tuesday by the Reserve Bank of India, got to do with your EPFO (Employees' Provident Fund Organisation)? Especially the little understood and complicated pension part, but also the larger PF part itself? Here are just a few simple points.

For the salaried and the middle class, a period of serious belt-tightening is predicted, especially for those who have loans to be repaid. If you listen to the talking heads on TV, it sounds very easy; a big vapid smile and then the advice to "increase tenure to reduce the EMI". But in reality, all that this achieves is what is known as a "perpetual horizon" and larger repayments towards the interest component of your loan. The interest component of your EPFO savings and other diversions to products like pension scheme, as well as service charges levied, become all the more important now.
Each rupee going as additional interest repayment due to higher interest rates hurts; but each rupee lost for whatever reason, which should have been earned but appears to vanish due to EPFO tactics, is going to hurt even worse, since it doubles the loss now.

Most of all, with inflation shooting up too, EPFO might just become a less attractive option as an automatic savings device, especially in view of the recent announcements that a private foreign bank, Standard Chartered, with its glorious track record in India, is now the "custodian of securities" for the government EPFO. In addition, the EPFO has appointed four fund managers—the State Bank of India, ICICI Bank, HSBC Bank and Reliance Capital—to look after EPFO funds, in both the public and the private sector, and also in the stock market.
(This is what Standard Chartered Bank stated in a court case in another episode, where they managed to lose the money of their investors. "Standard Chartered is contesting the claim and has said it is not liable for the lost money, arguing the investors were experienced and had signed papers exempting the bank from any duty to monitor their transactions. The bank would not be liable for the accuracy or completeness of such advice or recommendation," Standard Chartered Bank said in its response to the claim. - )
Agreed, it is not Standard Chartered Bank alone, but all the same, why now in these super-heated days of scams unfolding, has EPFO gone to a foreign private bank, linked to multiple tax havens abroad, when there are ample Indian banks with equally good or maybe even better people and assets? There are, as usual, no pre-clarifications available from the EPFO, whether on its website, in its media announcements, or anywhere else. Just a bunch of happy campers signing our money away, in what appears to be a depressingly familiar repeat.
This is indeed dangerous news overall for the EPFO, which as of date covers about five crore employees and has about Rs350,000 crore of investible funds (though records are not up-to-date at most EPFO offices even till 2009) and about Rs60,000 crore coming in every year, and a surplus of about Rs20,000 crore for investment. What was wrong with keeping these activities with government-owned banks and institutions, since the strongest point that the EPFO has for everybody is that it is totally kept away from any private games and controlled in every way by the Indian government?
For those who may wonder at the strong opposition this writer has to private participation in handling EPFO funds, the last time the Government of India placed one of its government provident funds into private hands, we had what is often referred to as the 'Home Trade Seaman's Provident Fund Scam', forgotten by many (though this writer as an ex-seafarer can recall those painful days which lasted for almost a decade before the government bailed the fund out) and the fact that it was endorsed by Sachin Tendulkar, amongst others, also seems to have been forgotten. The list of foreign banks involved would read like a who's who.

Incidentally, a little-known amendment to the Seaman's Provident Fund Act 1966, in 2007, which can also be applicable to the Employees' Provident Fund and Miscellaneous Provisions Act 1952 with its various interventions subsequently, as per some interpretations, says: "The Central Government shall not be liable to compensate or indemnify any loss caused to the Fund by deposits in an approved bank referred to in Section 4 or investment in securities or due to mismanagement, misappropriation or otherwise by the Board, any of its trustees, employees or any other person at any time."

Brilliant! One of the biggest safeguards that the employed middle class has, has suddenly gone into a bit of a loop. If the Central Government will not be liable to compensate, then who will for a government-run provident fund?
The prevailing wisdom and suggestion which many, including this writer, have put forth, has always been that a good employer who really means all she says about her employees will automatically provide a maximum possible option on EPFO, and a smart employee will grab it with both hands. Mainly because it is totally secured by the government. Let me make it clear right now that it is not just this writer, but a few other people who understand the business of provident fund in India, as well as the way private banks really work, who feel that the goalposts have arbitrarily and suddenly been changed by the Central Board of Trustees of the EPFO in India.

There is, however, one little understood component of the EPFO which people tend to ignore, forget, or simply are often not aware of. Many who are aware are simply confused by the multiple-choice options and the twists and turns within. This one does not seem to benefit from increased interest rates, does not have any sort of protection against inflation and most of all, it does not give you the right to even touch the principal, except under very member-unfriendly conditions. This is called the 'Employee Pension Scheme 1995' or EPS 1995, and is capable of providing opinions which vary from totally against it to those that claim it is the best thing to happen to people who are looking for steady income after retirement with maximum benefits.
As expected, the truth lies somewhere in the middle, and a lot depends on how you and your employer structure things. At this juncture, pension scheme will be the subject of my next article. Till then it would help if you simply ask your employers to provide you with a document outlining how much your pension scheme balances are as per their calculations, and then file an RTI with the EPFO asking them the same question.




6 years ago

EPS 1995 has not been revised since last 26 years. Employee, Member of EPS 1995 gets Rs. 1500 to 1600 per month for his investment of last 26 years and above. Is there any hope of revise


6 years ago

Very rightly argued by the author and thanks. Coupled wioth the toroughly corruption-ridden EPFO, this is very anti-working class move by way of creating a positive disintensive against the PF mode of saving. In other words, the bureaucracy-politician hegemony is against savings as an insurance against future. The pernicious effects of this will be clear in the short term itself, while politicians and their bureaucratic cohorts will be nurturing their funds stashed abroad.


6 years ago

I don't understand why government can't bring in trasparency in EPFO. They have setup SEBI, PFRDA, IRDA and god knows so many regularity bodies to keep private financial entities tamed and talk about EPFO, they have zero transparency OR accountability.

R Vijayaraghavan

6 years ago

Very good article which gives timely warnings to the salaried class. Please continue the good work and keep us informed about how we can safeguard our EPF and PPF investments

Titan Industries Q1 net profit jumps 76% at Rs143 crore

The Tata Group company's net profit for the first quarter of last fiscal stood at Rs81 crore

Watch, eyewear and jewellery maker Titan Industries today posted a 76% increase in its net profit at Rs143 crore for the first quarter ended 30 June 2011. The Tata Group company's net profit for the first quarter of last fiscal stood at Rs81 crore.

The firm's net sales for the three months ended 30 June 2011, grew 61.28% to Rs2,020 crore, compared to Rs1,253 crore in the corresponding period of last fiscal, it said in a filing to the Bombay Stock Exchange (BSE).

During the quarter, the firm's shareholders approved sub-division of existing equity shares of Rs10 face value into 10 shares of Rs1 each.

On Thursday, Titan ended 1.38% up at Rs227.75 on the Bombay Stock Exchange, while the benchmark Sensex declined 1.21% to 18,209.52.


L&T-MHI Turbine Generators tests APGENCO’s 800MW turbine generator

The feat was achieved at L&T-MHI’s integrated manufacturing and testing facility at Hazira in Gujarat

Larsen & Toubro's L&T-MHI Turbine Generators Pvt Ltd has assembled and tested the performance of 800MW turbine generator for unit 2 of APGENCO's (Andhra Pradesh Power Generation Corporation) power plant coming up at Krishnapatnam, in Andhra Pradesh.

The feat was achieved at L&T-MHI's integrated manufacturing and testing facility at Hazira in Gujarat. The Hazira test facility established and validated under the technical guidance of Mitshubishi Electrical Company can test generators of up to 1000 MW.   

On Thursday, L&T ended 1.02% down at Rs1,738.85 on the Bombay Stock Exchange, while the benchmark Sensex declined 1.21% to 18,209.52.


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