Thursday, June 14, 2007

Reforming EPFO

Mukul Asher has a great article on EPFO, the organisation which runs the mandatory mixed DB+DC pension system for private firms with more than 20 employees in India, in the June-July 2007 issue of CFO Connect.

1. EPFO is a daylight robbery. Its compulsory and EPFO organizations are inefficient, unaccountable, unreachable and non-transparent. They make you fill up the forms to take money out of it and the form must be accurately filled with information you don't have or they reject your claims. Now first why ask a person any information that is not needed. For e.g. why exactly should an account holder know what amount they have in the account if all a person wants to do is close the account and get everything paid back.

2. The article on EPFO could have been made more complete by discussing another scheme - the Public Provident Scheme (PPF). Broadly the latter shares some features of EPF such as virtual government guarantee on principal and interest and a tax-free return - currently 8 % p.a but down from 12 % a few years ago. Both also qualify as investments under section 80 C. PPF also permits premature withdrawals.

PPF has two major advantages. One, it is open to all citizens and not only to a privileged few in the organized sector. Two, it has an annual cap of Rs 70,000 per subscriber which restricts the benefits of relatively high and guaranteed returns.

PPF may also be less vulnerable to political pressures. It is a scandal that the EPFO has not been able to fix the interest rate for 2006-07 even till June 2007 though it should have been done a year ago. The Board of Trustees deserve to be sacked.

As the author argues the more problematic of the EPFO schemes is the EPS. It ought to be closed down. The existing EPF accounts could be merged/transferred to the PPF. Individuals will be able to decide where to hold and take them and not be dependent on a centralized bureaucracy. To make systematic savings possible provision of direct debits from employee salaries to PPF accounts should be allowed. Employers could also voluntarily contribute to the account. The new PPF could be allowed to offer guaranteed, tax-free returns but with a limit on the annual deposit amount. This would improve equity and also diminish resistance to the idea. PAN numbers could be used to avoid people misusing the facility.

Richer or more financially sophisticated individuals would also have the freedom to consider other schemes such as those offered by insurance companies, MFs, etc.

The changes outlined above don't make for an ideal scheme but could be a half-way house to eventual reform in this sector.

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