A plan by the trustees of the Employees’ Provident Fund Organsiation (EPFO) to begin investing a fifth or perhaps a quarter of recent PF accretions annually in equities is prompted by a good-looking, 14% annualised return by means of this route during the last seven years, which was practically double the positive aspects from debt devices through the interval, official sources stated.
The retirement fund physique needed to hold the return on PF investments for its 60 million subscribers at a four-decade low of 8.1% for 2021-22, partly due to the low-interest price regime that prevailed lately. The EPFO needed to redeem a few of its investments in fairness to seek out sources for the Rs 76,000-crore curiosity payout to its practically 60 million subscribers for 2021-22. Return on debt declined to six.78% in 2020-21, from 7.5% in 2019-20 and eight.5% in 2018-19.
The EPFO began investing monies in equities in 2015-16 — August 5, 2015 to be exact — with a cautious publicity of 5%. The publicity was doubled within the subsequent 12 months itself and brought to fifteen% in 2017-18 (see chart).
The Covid-19 pandemic has delayed an additional enhance in fairness publicity, despite the fact that the EPFO’s returns from fairness investments have been even greater through the interval.
The EPFO invests equities within the type of alternate traded funds (ETFS), each on the Nifty and Sensex platforms.
With over Rs 2.1-trillion annual contributions by subscribers, the EPFO’s amassed corpus is round Rs 18 trillion now.
The Finance Investment and Audit Committee (FIAC) of the EPFO has beneficial that publicity to equities be enhanced to 25% in two equal tranches, from 15% now. Analysts stated the transfer wouldn’t solely enhance the retirement advantages of the subscribers, however would additionally make the EPF extra related for savers.
Unless the funding sample is modified by the EPFO with an additional shift to fairness, decrease returns would pressure workers to show in the direction of extra profitable choices such because the National Pension Scheme (NPS) to park their financial savings, specialists stated.
Of course, the present market volatility and the geopolitical scenario can be thought of by the EPFO’s Central Board of Trustee because it meets later this month, to contemplate the FIAC’s suggestions, amongst different issues. There is a close to consensus on the necessity to elevate the publicity to equities however the timing and quantum of the rise must be determined, an official supply stated, on situation of anonymity.
As per the extant funding sample, the EPFO can make investments between 45-65% in authorities securities, between 20-45% in debt devices, as much as 5% in short-term debt devices and as much as 5% in asset-backed, belief structured & miscellaneous investments. It can make investments between 5-15% in equities.
“For subscribers, the returns from PF investments have steadily decreased over the years, with just 8.1% return announced for FY22. There is an increasing desire amongst new and young employees who are financially prudent and well informed, to opt out of PF altogether. Many existing PF members, who can’t opt out completely, are also asking their employers to limit their PF contributions to the minimum required by law (12% of Rs 15,000 or Rs 1,800 a month instead of actual basic salary), and preferring to invest the remainder into higher-yield instruments,” stated Atul Gupta, accomplice at Trilegal.
“The taxation on PF contributions above Rs 7.5 lakh annually has also resulted in many high-income employees demanding a restructure of their pay to limit PF contributions and retain tax efficiency. While PF returns are still tax-free and secure for the most part, the EPFO would nonetheless need to offer better returns to remain attractive to employees,” Gupta stated.
For Gautam Bhardwaj, co-founder of pinBox, a worldwide pension-tech enterprise dedicated to digital micro-pension inclusion in creating international locations, the proposal to lift the edge of funding in equities is a “very sensible”. Since 85% of EPF subscribers are low-income staff with modest contributions, they desperately want greater funding returns on their financial savings.
“After all, every 1% rise in returns can increase retirement benefits by nearly 20%. We have already seen NPS subscribers benefit from equities over the last 15 years. Increasing allocation into equities will also allow EPFO subscribers to participate in India’s economic growth. Since monthly PF contributions are like a systematic investment plan or SIP, the risk of market volatility will be minimal over a multiple decade savings horizon,” Bhardwaj stated.
Former central provident fund commissioner KK Jalan, nevertheless, stated any choice to reinforce publicity ought to be taken with warning. “Let the EPFO stabilise with the earlier participation in equity,” he stated.
Source: www.financialexpress.com”