Wednesday, September 22, 2010

EPFO goof up --boon or bane??

It’s official now—EPFO –which manages a corpus of Rs. 1,30,000 crores –is facing a shortfall of Rs. 54,000 crores.!! (According to the Central Provident Fund Commissioner).If this piece of news item is indeed true then this black hole is 10 times bigger (or deeper, shall we say) then the one created by the erstwhile UTI!

Wait! The story is not over yet. Quite unlike a prudent person, instead of taking urgent steps to set the house in order, EPFO has announced an increase of 1% in interest pay out for 2010-2011(only) to 9.50% (since it found about Rs. 1700 crore probably tucked away on top of their cup board.)It seems rather strange that while on one hand the organization meets its liabilities out of a subsidy of Rs.1100 crores annually from the government, it is handing out largesse to its members to the tune of 1700 crores.

The writing was all over the wall for the Board of trustees to see. Falling interest rates and an archaic investment pattern have resulted in a deficit in actuarial valuation to the tune of Rs.54,000 crores.

That the organization is facing this huge shortfall is not too difficult to understand! Typically a pension fund/scheme lays down either the contributions to be made into a worker’s account, or fixes the pension amount to be paid to him at the time of his retirement. However, the EPFO spells out both the contributions as well as the benefits—which is unsustainable.

EPFO must be really lucky to be able to find out Rs. 1,700 crores (wonder why such hidden treasures do not come my way) and that too distributing amongst those who may not be even entitled to it (this surplus belongs in part to those workers who may not be working any more as it was earned over last 2 decades or so).

What however this revelation by the Central PF Commissioner’s observation highlights is that EPFO’s operations are in shambles! However more alarming is the casual acceptance of what is to be done with the re-discovered money! If today they have found a surplus due to a calculation error, they may again re-discover a shortfall tomorrow due to a calculation error. Will the Board be able to re-cover the largesse from the workers citing calculation error?? The one fact that hits the eye is that the EPFO’s operations are in shambles!! The pertinent point to ask is whether is it safe to continue to park the funds with EPFO?

There’s no way but to turn the EPFO into a collective investment scheme where each member get what his money has earned. But then that what’s what NPS is supposed to be. Could EPFO be merged into NPS? (possibly an out of the box solution).

I guess the day’s not too far away when the EPFO will have to go back to its mummy & daddy for a careful re-calculation of its financial position. But may be it would be too late by than….but that’s exactly what mom and dad are there for isn’t it—with deep pockets (hopefully)