EPFO’s interest rate needs to be aligned with broader economy. But it also needs to better manage the investment corpus | The Indian Express

Clipped from: https://indianexpress.com/article/opinion/editorials/a-reality-check-epfo-government-securities-indian-economy-7821492/

Even as EPFO needs more leeway in setting its interest rate, it needs to better manage the risk-reward profile of its investments, while at the same time being more transparent about its investments.

Currently, the yield on the 10-year G-sec is hovering around 6.82 per cent, while the spread between state development loans and government securities is around 40 basis points.

Last week, the Central Board of Trustees of the Employees Provident Fund Organisation (EPFO) recommended an interest rate of 8.1 per cent for its subscribers for the financial year 2021-22. Though it remains considerably higher than the interest rates offered on bank deposits and small savings schemes, this is the lowest interest rate paid in the last four decades. The decision is unlikely to be popular, especially at a time when inflation is edging upwards — the organisation had 6.42 crore contributing members last year. However, the interest rate offered by the EPFO needs to be in line with the existing low interest rate regime in the broader economy.

Currently, the yield on the 10-year G-sec is hovering around 6.82 per cent, while the spread between state development loans and government securities is around 40 basis points. Thus, as a significant share of EPFO’s corpus is directed towards government securities, offering a rate that is considerably higher than that offered on government bonds would have been financially unviable. According to reports, if the EPFO had maintained the interest rate at last year’s level of 8.5 per cent, the organisation would have faced a deficit of Rs 3,500 crore. However, by cutting the rate to 8.1 per cent, it will now be left with a surplus of Rs 450 crore. Moreover, offering a higher interest rate would involve taking on greater risk — the excess returns offered by EPFO over government securities can be generated either through investments in corporate papers, which offer higher interest rates, or through returns generated from equity market investments. While the higher rate this year has been met in part by the realisation of capital gains worth Rs 5,529 crore on its equity investments, taking on greater risk requires careful consideration.

As the EPFO is an integral part of the country’s social security architecture, it must minimise the risks associated with its investments. This is not to say that its corpus cannot be managed more efficiently. After all, returns offered by the National Pension Scheme are superior in comparison. Thus, even as EPFO needs more leeway in setting its interest rate, it needs to better manage the risk-reward profile of its investments, while at the same time being more transparent about its investments.

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