EPF or NPS? Why giving workers a choice is a bad idea
Moneylife Digital Team 21 April 2015

One is a guaranteed return product and another is market-linked. Even well-educated people who attend Moneylife Foundation seminars don’t understand the distinction between the two 


Employees may soon have an option to choose between the employee provident fund (EPF) scheme run by retirement fund body EPFO and National Pension System (NPS). A proposal in this regard is expected to be discussed by the Cabinet next week. The proposal is part of the bill to make comprehensive amendments to the Employees' Provident Funds and Miscellaneous Provisions Act 1952.
We all love choice but exercising choice in which colour of shirt or dress to choose is different from making choices in financial products. Choices are at the heart of many bad decisions because people either adopt the default choices or choose at random. Jason Zweig, author of the classical book ‘Your Money and Your Brain’, reports the study of hundreds of 401(k) plans (defined contribution plans for retirement in the US) which found that the more funds a plan offers, the more reluctant people are to sign up and save for their retirement. “The harder the choice feels, the less people want to choose,” explains Zweig. Adding even more choices will lower one’s odds of making a good decision and increase their chances of regretting whatever decision they make. 
While in the current scenario, the employee will have to choose between EPF or NPS, though it may seem fairly simple, the employee will know little of the pros and cons of investing in each. The government may end up creating confusion among workers and employees by offering them a choice. EPF is a guaranteed scheme run by the government. NPS will invest in market-linked products. They are as different as chalk and cheese. We have noticed that even the urban, educated people who have attended dozens of financial literacy seminars of Moneylife Foundation, do not know the difference between fixed income products, where capital is guaranteed and so-called fixed income products that are market-linked and therefore, volatile.
Another study published in Nudge, a book written by University of Chicago economist Richard H. Thaler and Harvard Law School Professor Cass R. Sunstein, found that when investors were provided two investment choices, one of stocks and the other of bonds, they invested 50% in each. The experiment was repeated, but this time the participants were provided the choice of stocks and a balanced fund (50:50, stocks and bonds). Here again, they invested 50% in each. Going by the first allocation, they should have ideally chosen the balanced fund, but they chose to split the investment evenly between the two options, increasing their allocation to stocks. This shows that the average person finds it difficult to weigh even the simplest of investment choices.
“Most employees have difficulty understanding how numbers like savings rate, expected rate of return, and volatility translate into changes in lifestyle when they are old. Most people would need some help,” the authors write.
The Employees' Provident Fund Organisation will be the regulatory body for monitoring the implementation of the scheme as there could be cases, where worker neither go to EPF nor NPS. This is in line with finance minister Arun Jaitley’s Budget 2015 speech.
“With respect to the EPF, the employee needs to be provided two options. Firstly, the employee may opt for EPF or the New Pension Scheme (NPS)...For employees below a certain threshold of monthly income, contribution to EPF should be optional, without affecting or reducing the employer's contribution," Jaitley had said in Parliament.
Whether the government will provide a default option is still not known. 
Mr Jitendra
6 years ago
I suggest that articles should not only talk about EPF or NPS.

There are multiple abreviations that come up when we should discuss retirement: EPF & PPF and EPS & NPS.

When we already had the EPF and the PPF schemes, was there a need to have NPS? In NPS 60% of the fund can be withdrawn as PF during retirement? Why not simply ask the employee to open or provide valid PPF account? Why create complex architecture of multiple person levels for NPS and then crib "our NPS is not picking upppp!"? And then if no one buys the fruit then push that fruit through the throats?
MG Warrier
6 years ago
In the first place, as the New Pension System(or its new avatar ‘National Pension System’) did not have the social security ingredients the traditional ‘defined payment’ pension schemes had, and the scheme had more similarities with Employees’ Provident Fund Scheme implementation by the Employees’ Provident Fund Organisation(EPFO)since 1952 except in relation to investment of funds in the equity market, there was no need for a new agency to implement NPS. The task should have been given to EPFO with freedom to upskill its workforce and acquire expertise from outside for investment management. This would have reduced the chaotic situation faced by PFRDA when it was hanging in the air without much legal support for about a decade. In retrospect, the belated admission that no one is sure that NPS is a better option than the existing provident fund scheme is to be welcomed.
Moneylife foundation, on its part, should advise employees not covered by traditional pension schemes(which have certainty about ‘defined payment’) to include the cost element to buy retirement benefit products when they negotiate wage packages and individually decide the investment pattern of the savings meant for post-retirement life based on assumed needs.
Shubhankar Bhardwaj
6 years ago
Please confirm - if an employee opts for NPS, will it be mandatory for the employer to co-contribute in the corpus as is mandated in EPF?
Mr Jitendra
6 years ago
Unless and until Indian Government permanantly marks the NPS as EEE(Exempt, Exempt and Exempt) NPS will not take off. Moreover the operational architecture in NPS is a cause of worry.

In EPF, the employee, his employer and EPFO office is the structure.

In NPS, it all starts with POS and then PRAN, then himself then his employer then his fund manager, then CPRA and all that stuff.

Now they are giving choice but in future if they see that NPS is failing to take off then they make make a compulsion in a free and liberal democracy.
Dharmik Bhatt
6 years ago
Conceptually EPF/EPS is very much superior financial product than NPS. Only requirement as on date is to improve its administration structure and it may be made more employees friendly and time bound disposal of all cases. Where as NPS is a crocked financial product which accommodates more and more nuisance elements at the cost of subscribers to chew away profit by jiggled financial procedures and they leave subscribers with net dismal return of 3% to 4% over their gross investment over period of 30 to 40 years. Our leaders are happy with NPS because they get guaranteed revised salary and dearness allowance based life time pension for serving the country for five years only. And unethical money generated by NPS typed FINANCIAL PRODUCTS are ruining financial health of tax payers of the country. I am of opinion that for salary class(who does not have any access to unaccounted money) EPF/EPS is better scheme than NPS without any doubt.
Sudeep Dwary
6 years ago
So what's the conclusion? How should one decide which one suits his requirements and if given a choice how should one allocate money to both, epf and nps?
Amol Shah
6 years ago
Well raised point. More choices more confusion. Given our literacy rate such options will only benefit the mediator, if any. One cannot shrug out responsibilities in the name of privatization. Rather making a world class institute out of it is the best option.
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