Retire your savings

Sunil Jain / New Delhi June 30, 2008, 0:53 IST
This Saturday will be critical for India's 400-million-strong workforce, which is desperately trying to put together a retirement plan to fund even a very small part of its post-retirement needs. So far, just 15-20 million people (or a little over 5 per cent of the workforce), who have savings in the Employees Provident Fund Organisation (the EPFO, in turn has an EPF and an EPS component), have something near a retirement fund. Based on the Rs 103,837 crore corpus the Employees Provident Fund (EPF) has, this means the average corpus is Rs 51,918 — at the normal rates of annuity, this will give retirees the princely sum of Rs 3,634 as annual payments for the rest of their lives. Theoretically, all these people are also covered by the Employees Pension Scheme (EPS) and so should be entitled to a maximum of Rs 3,250 per month of pension, but to avail of this, an individual must have contributed to the EPS for at least ten years. In other words, even for this 5 per cent of the work force, the social security cover is next to negligible.
Which is why, according to the Invest India Market Solutions' survey, around 80 million people across the country are interested in making regular retirement savings — while they can do this even today by investing in mutual funds, the costs are much higher. The Coal Miners' Provident Fund recently gave its funds to ICICI Securities to handle at a cost of one basis point (0.01 per cent) while the average asset management fee charged by a mutual fund is around 100 basis points (1 per cent). Broadly speaking, an increase of this magnitude, over the 30-35-year period an individual contributes to a pension fund, means the eventual money got reduces by around a fifth.
So, if people want to invest in retirement funds, the EPFO is really their only option right now. But as is well known, and not just to regular readers of this column, the EPFO is riddled with problems (a Rs 25,000 crore shortfall in the EPS, rising frauds due to single-entry accounting, poor ability to transfer accounts, and so on). So, really the best solution was to allow other players, including from the private sector, into this business — indeed, competition would force the EPFO to also get more efficient, much to the relief of its 15-20 million account holders. That competition was supposed to come under the aegis of the New Pension Scheme (NPS), to be regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which would ensure firms offering such services functioned fairly, maintained proper accounts, followed investment guidelines and maintained minimum capital balances to provide security to those trusting them with their savings.
So, in early 2005, the PFRDA Bill was sent to Parliament, from where it went to the Standing Committee on Finance, which, realising the urgency, gave a few suggestions for change within a few months — the Bill has since been languishing. The primary reason for this was, as has been routine with this government, the Left parties opposed this. First, they argued that hard-earned savings of the working class could not be invested in the stock markets as pension fund managers would certainly do. This was countered by the PFRDA's position that each fund manager would be mandated to offer a "safe" option where savings would only be invested in, say, government bonds. After this, the Left argued that private fund managers weren't to be trusted.
So it came as a pleasant surprise when, on April 17, the EPFO invited bids from various fund managers to handle the fresh deposits it got each year — till now, only the State Bank of India has been handling these funds. While the EPFO has an existing corpus of around Rs 150,000 crore (for both EPF and EPS), it gets fresh deposits of around Rs 9,000 crore (for both EPF and EPS) each year. Apart from the fact that competition would help maximise returns for the EPFO's existing account base, there was the larger impact. After all, if the Left-dominated EPFO could finally allow private fund managers, then why couldn't the NPS be put in place using private fund managers along with public sector ones?
This is when the problem arose. According to a report in a prominent paper, WR Varada Rajan, secretary of the Centre of Indian Trade Unions and a member of the EPFO's Central Board of Trustees, is not in favour of allowing private sector fund managers. So why did the EPFO issue advertisements asking for bids, why did it shortlist 17 of the 20 fund managers, and finally get them to bid? Varada Rajan told the paper "it was done to introduce competition in fund management".
While a newspaper report itself doesn't mean much, the final proof will be available on Saturday, when the EPFO's trustees will decide on the proposal. If the meeting decides no private players are to be involved, apart from being a fraud on those who bid, it will mean the chances of the PFRDA Bill getting passed, and of 400 million workers being able to select their pension fund managers, are that much bleaker.
PS: CPI(M) leader Prakash Karat has a point when he ridicules the prime minister for giving more importance to the nuclear deal than to inflation, but what does blocking workers' chances to get a better provident fund deal say about the Left leaders?