The return on workers’ retirement savings parked with the Employees’ Provident Fund Organisation (EPFO) has been slashed to 8.1% for 2021-22 from the 8.5% rate credited to EPF members’ accounts in the last two years.
The last time the EPF savings were paid an annual return this low was in 1977-78, when the rate was 8%, but that marked the highest EPF rate at the time since the EPFO’s inception in 1952. Since then, the EPF rate has only been lower than 8.5% in three years — 1979-80, 1980-81 and 2011-12 — when an 8.25% return was paid on balances.
The EPFO’s Central Board of Trustees (CBT), chaired by Labour and Employment Minister Bhupender Yadav, recommended 8.1% at its meeting in Guwahati on Saturday. The rate will have to be ratified by the Finance Ministry before it is notified and credited to members’ accounts.
The cut in the EPF rate, at a time when inflation is resurging, attracted criticism from the central trade union representatives on the board who called for the 8.5% return to be retained. Employee representatives had also opposed the last rate cut on EPF savings from 8.65% in 2018-19 to 8.5% in 2019-20.
Mr. Yadav sought to downplay concerns and said he feels good to announce 8.1% at a time when a 10-year fixed deposit with the State Bank of India yields just around 5.4%, while returns on savings instruments like the Public Provident Fund are in the range of 6.8% to 7.1%.
“This year, our Board, keeping the kind of international situation and the [volatile] condition of the stock markets, has opted to keep social security goals in mind with the investments. We cannot invest in high–risk instruments, we are looking at stable returns for social security needs,” he said after the meeting.
The EPFO’s income from investments this year stood at ₹76,768 crore from about ₹70,000 crore in 2020-21, when it had paid out 8.5% to EPF accounts. The EPF corpus went up during the year from ₹8.29 lakh crore to ₹9.42 lakh crore.
The EPFO has been investing at least 5% of incremental EPF inflows into members’ accounts into the equity markets since 2015-16. A minimum 45% of fresh accruals are invested in government securities, with a ceiling of 65%.
K.E. Raghunathan, an EPFO trustee and a member of its Board’s Finance and Investment Advisory Committee, told The Hindu that the 8.1% rate became feasible amid the current tumult in the markets, because the EPFO’s fund managers had offloaded some of its equity and bond holdings before the Russia–Ukraine war.
“Considering the present situation, this has been possible only because EPFO sold some of its ETF [exchange-traded funds] and bond holdings in the last quarter of the year before the Russia–Ukraine conflict. Normally, they are liquidated in the last month of the financial year,” he said.
“We will still have a surplus of ₹450 crore,” the Union Minister said, adding that the trustees’ recommendation has been made keeping safety as a priority and more attractive investment avenues for EPF savings will be considered, going forward.
The EPFO is the country’s largest retirement fund and the second largest non–banking financial institution with a corpus of about ₹16 lakh crore. It has 24.77 crore members with EPF accounts, of which 14.36 crore members were allotted Unique Account Numbers (UANs) as of March 31, 2020. About five crore members are active contributors with fresh accretions made into their EPF accounts during 2019–20.
“Under the circumstances, 8.1% is a fairly reasonable and decent, if not the best, return for members, considering that most similar savings vehicles are offering around 7% interest. It is important to remember that EPF savings are invested for the long term and therefore returns have to be sustained over time,” Mr. Raghunathan said.
Calling the rate cut a balancing act between pursuing higher returns and maintaining high safety, he said: “It is a clash between ‘Wants’ and ‘Means’ and we had to walk carefully treading a safe midway path.”
It has been decided that the EPFO Board will meet every three–four months and the next meeting will be held in June or July in Bengaluru, the Minister said. It was originally proposed that the meeting be held in Kerala but there was some apprehension about the monsoon there at the time so Bengaluru was chosen to ensure the Board meets in South India next time, Mr. Yadav said.
The EPF accounts are mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers, with 12% of the basic pay and dearness allowance deducted as employees’ contribution and another 12% remitted by the employer. Part of this cumulative 24% contribution is remitted to the Employees’ Pension Scheme of 1995.