Is playing the stock market prudent? No, say unions
- EPFO to invest 5% incremental annual inflow into equities
- Can jack this up to 15% later
- Investment through ETFs run by SBI
- More capital inflow for stock markets
- But your PF is now open to speculative risks
- Labour minister, also chairman of EPFO trustee board, backs move
- Industry, financial markets, several analysts endorse
- Trade unions of all colours opposed to risk exposure
The Employees' Provident Fund Organisation's (EPFO) decision last week to open up its kitty to the stock market has drawn polarised reactions: Financial markets and industry captains cheered the move, but several others have been sceptical, even angry.
The EPFO administers a contributory fund, a pension scheme and an insurance scheme for organised sector employees in India. With more than 5 crore subscribers, it is among the largest such organisations in the world.
In the absence of a strong social security net in India, the provident fund has been one of the few tools available to the working class to ensure some kind of financial security. The focus of the EPFO, thus, has been to keep its money safe, leading it to invest heavily in government bonds - low yield, but safe.
Equities, of course, are a different ball game. Returns on investments may swing from rocking to rock-bottom in a matter of a few trading sessions.
So, while this as an opportunity for the market to lap up fresh capital, trade unions and workers' representatives are anxious to protect what they have been saving for a rainy day.
"The PF is our hard-earned money, not the government's property to gamble away in the stock market," said Satvir, General Secretary for CITU, Haryana.
Perhaps to reduce the risk, The EPFO has decided to invest only 5% of its incremental annual deposits in the stock market through exchange-traded funds (ETFs) managed by the State Bank of India. Three-quarters of the investment will be in the National Security Exchange and the rest in the Bombay Stock Exchange (BSE).
" We have decided to take it slow and see how it goes," EPFO's Central Provident Fund Commissioner K K Jalan said.
The ratio may change if some of the investment is channelled to the CPSE ETF, comprising stocks of only public sector companies.
ETF are funds whose composition mirror the index they trade on, in effect linking investments in them to the fortunes of the broader exchange.
Trade unions, including RSS-backed Bharatiya Mazdoor Sangh, are united in their opposition to the move
Labour minister Bandaru Dattatreya, who also chairs EPFO's Central Board of Trustees, justified the move by saying returns from government securities lagged the rate of inflation.
The rate of interest on PF deposits was 8.75% in the year ended March 31 2015, while the rise in the consumer price index was 13% in the same period.
The fear of high risk, however, remains. In case a company goes bankrupt, shareholders' right comes the last, after providing for all other obligations.
" There is absolutely no reason why workers' retirement funds should be invested in the extremely risky zone of the stock market," according to Gautam Mody, general secretary of New Trade Union Initiative.
A mere 5% investment, even at a very high rate of interest would not make much difference to the broader kitty, he argued. Putting in more money - there is a provision to plough in up to 15% of the fund's incremental inflow - would hugely heighten the risk.
" The real reason behind this is to put money into the private sector," he said. The allegation was echoed by Arun Kumar, professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University (JNU).
" Middle- or low-income workers deposit money for old age for security and certainty. The government's commitment means something to an old-age pensioner, but the commitment of the stock market is too risky and untrustworthy," he said.
" In the Harshad Mehta scam, money from the provident fund was invested in the stock market. After the market collapsed, many lost all their money," Kumar pointed out.
Underlining the financial turmoil of the last decade, when the stock market crashed by 50%, he said an overnight loss may be no big deal for an Ambani, but would break the back of a worker who had put in his life's savings.
" There is reasonable indication that the stock market is not driven by fundamentals but by a speculative spirit," said Mody, who also questioned the legality of the move.
Almost every trade union or workers' representative - including Bharatiya Mazdoor Sangh, the labour wing of the RSS - in the EPFO's trustee board opposed the move.
Many, however, found the opposition without reason.
" Since the bulk of the pension money is invested in stable portfolios such as government bonds, a small investment in the stock market is not a big risk," said Ravi Srivastava, a professor of Social Scienes at the JNU.
" As long as the EPFO guarantees a minimum rate of interest to the employees, it's okay. However, if there is a bigger investment in the future or no gauranteed rate of return, that's risky." he added.
BSE Chief Executive Ashish Chauhan welcomed he move, saying: "Investment of pension funds in stock markets is an internationally accepted practice. Many citizens world over have been able to obtain better returns by investing through stock markets." Using ETFs will ensure transparency, he said.
Central trade unions are going on strike on 2 September
Economist Sudipto Mandal, a member of 14th Finance Commission, also backed the " abundantly cautious foray," saying the EPFO had been quite conservative for long.
The plan to invest state funds in the stock market has been around for long, but gained traction after the current government assumed power.
" I feel if the market crashes or there's a deficit of some kind in returns, there will be some implicit sovereign guarantee from the government. I don't think the government will allow employees to lose money."
Workers vs Industry
The unions remain unassured.
" This government is a one-way street. They don't have the obligation to respond or reply to anything in a democratic spirit" said Mody.
Satvir said correspondence to the government have gone unanswered, and the central trade unions are planning to organise a strike on September 2.
" All trade unions are unanimously opposing the move. This is an anti-worker stand taken by the government," he said.
So will the issue lead to a new spell of tension between the labour force and the industry?
" The idea to weaken the trade union movement to facilitate the industry has been followed by every subsequent government since 1991. Trade unions have been resisting this for a long time, but the only option left is to strike" said Kumar.