Govt plans to invest more of Provident Fund in equity market. Is it too risky?
This week, the labour ministry decided to increase the market exposure of the Employees' Provident Fund, the primary social security net for workers, from 5% to 10%. In simple terms, one in every 10 rupees saved in the EPF will be invested in the equity market starting this fiscal.
The decision clears the way for a total investment of about Rs 13,000 crore from the EPF in the equity market.
Since the Narendra Modi government decided to invest workers' retirement savings in the market last year, the Employees' Provident Fund Organisation has parked roughly Rs 7,500 crore in equities traded on the stock market. Last month, Dattatreya said the investment had grown to about Rs 8,500 crore, which would mean an absolute return of over 13%.
Labour Minister Bandaru Dattatreya clarified that the latest move had the approval of the finance ministry. It was, however, done without consulting the Central Board of Trustees, which includes representatives of employee unions and is tasked with administering the EPF.
Several CBT members expressed reservations about the decision, with some describing it as "unjust" to the lakhs of workers whose savings form the fund.
"No member from the CBT was consulted before this decision was made. This is outrageous," said Virjesh Upadhyay, Secretary, Bharatiya Mazdoor Sangh and a CBT member. "We are completely against the decision."
Sanjeeva Reddy of the Indian National Trade Union Congress, who is also part of the CBT, said, "The government has made it clear that it would not be responsible for any loss due to the investment. Why would they want to invest in equity if they can't account for the losses. The CBT will be held responsible in case of losses, yet, ironically, they have not been consulted."
The labour ministry, however, dismissed these concerns and insisted that risk to the investment was not substantial. "This is a calculative risk. Why should the government be responsible for the loss? For better returns some risk must be taken. Across the world, countries have invested around 30% in equity but we have only invested 10%," said Labour Secretary Shankar Aggarwal.
Reddy retorted: "When the government has not invested a single penny in the savings, how could they decide without the approval of those who have saved to increase the investment? Workers are under the illusion that their money is in safe hands."
He added: "Unless they can give an assurance or an undertaking that in case of any loss they would compensate the workers, the move is in a way illegal."
The current EPF interest rates are linked to government bond yields, which have fallen significantly since the last interest rate cut by the Reserve Bank of India in March. This, in fact, could be the primary reason behind the decision to invest the EPF in equity.
How other nations handle EPF
In Malaysia, membership in the EPF is mandatory even for the privately employed. Although the country parks up to 43% of its EPF in equity, the investments are generally low-risk, which yield lower returns but guarantee the return of the principal amount at least.
In addition, Malaysia has the Social Security Organisation, which provides other social welfare benefits to workers.
Singapore's Central Provident Fund guarantees its workers risk-free interest of 2.5% on their retirement savings regardless on how much the government invests in equity. Historically though, the CFP has never provided returns of less than 4%.
Hong Kong Mandatory Provident Fund has an unusually high exposure to equity, averaging about 65%, with 38% of the investment in stocks. While this risk-taking has invited criticism, the investments have, on an average, yielded a return of 4% to all employees in the last 15 years. Hong Kong's economy, however, has long been more stable than India's.