EPFO may Give Part Payout in MF-Like Units

EPFO may Give Part Payout in MF-Like Units

Dividend on equity investments may also be distributed among its 45 million subscribers

Subscribers to the Employees' Provident Fund Organisation (EPFO) may soon get part of their retirement payout in the form of units proportionate to the money the state-run pension fund invests in equities, a senior official said. EPFO invests up to 15% of its annual incremental corpus -pegged at ` . 1.4 lakh crore -in stocks through exchange-traded funds (ETFs) to take advantage of higher returns from equities. The rest of the money is invested in government securities and other forms of debt.

However, on retirement, the subscriber gets a consolidated sum based on interest rate decided by the EPFO's central board of trustees (CBT). If the proposal cited above is adopted, then part of this payout will be in the form of units, similar to that of a mutual fund, that can be encashed at time of exit. This would also mean that the dividend earned by EPFO annually on its equity investment will be distributed among its 45 million subscribers, thus fetching them higher returns.

The return on equity investment isn't factored in while calculating the interest rate declared every year nor is it reflected in the PF statement. The cumulative return on EPFO's investment in equity was 13.72% until May in the two years since it began putting money in ETFs. EPFO declared an interest rate payout of 8.75% in FY15, 8.8% in FY16 and 8.65% in FY17.The labour ministry is finalising the unitisation policy, said the official cited above.

“The policy has been discussed with stakeholders and we hope the central board of trustees will approve of it when it meets later this month,“ the official added.If this proposal is implemented, subscribers can check the status of their PF in terms of investment in debt and equity-based units allotted to them. A subscriber may also be allowed to delay encashment of the units at the time of exit.

“Once a subscriber decides to withdraw their PF, 85% of total investment is paid back along with the rate of interest declared while their 15% of total investment made in equity is paid back by multiply ing the units accumulated with the value of equity on that particular day,“ said the official cited above.“The subscriber would also have an option to defer the withdrawal of equity investment by one to two years, depending on the tenure finalised by CBT, if he thinks the same can fetch better returns later.“ PF withdrawals are tax free.

EPFO has been raising the amount it invests in equities since 2015, when it started with 5% of the corpus. Its investment in FY16 was Rs 6,577 crore, rising to Rs 14,982 crore or 10% of its corpus in the following year. This year the investment limit has been raised to 15%, which translates into about Rs 20,000 crore being invested in ETFs.

The investment in equity has been opposed by trade unions on the grounds that returns are not assured and that, in the absence of any selloff policy, the returns remain on paper and do not bring monetary benefits. The proposal under consideration should counter that argument, the official said

The Economic Times, New Delhi, 5th October 2017