‘Increase in equity exposure key to Employees’ Provident Fund’s relevance to savers’

A plan by the trustees of the Employees’ Provident Fund Organsiation (EPFO) to begin investing a fifth or perhaps a quarter of contemporary PF accretions every year 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 beneficial properties from debt devices throughout the interval, official sources stated.

The retirement fund physique had to maintain 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 rate regime that prevailed in latest years. The EPFO had to redeem a few of its investments in equity to discover resources for the Rs 76,000-crore curiosity payout to its practically 60 million subscribers for 2021-22. Return on debt declined to 6.78% 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 exposure of 5%. The exposure was doubled in the following year itself and brought to 15% in 2017-18 (see chart).

The Covid-19 pandemic has delayed an additional improve in equity exposure, despite the fact that the EPFO’s returns from equity investments had been even larger throughout the interval.

The EPFO invests equities in 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 accrued corpus is round Rs 18 trillion now.

The Finance Investment and Audit Committee (FIAC) of the EPFO has really useful that exposure to equities be enhanced to 25% in two equal tranches, from 15% now. Analysts stated the transfer wouldn’t solely improve 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 equity, decrease returns would drive workers to flip 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 will probably 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 exposure to equities however the timing and quantum of the rise can have to 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, up to 5% in short-term debt devices and up to 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 elevate the brink of funding in equities is a “very sensible”. Since 85% of EPF subscribers are low-income staff with modest contributions, they desperately want larger 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, nonetheless, stated any resolution to improve exposure needs to be taken with warning. “Let the EPFO stabilise with the earlier participation in equity,” he stated.

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