There's a way to exit PFs' equity plans

NEW DELHI: The Employees Provident Fund may consider allowing its members the freedom to opt out of the new equity-related investment route being proposed for non-government provident funds.

The move has been supported by some labour unions, which feel that employees who are close to retirement, should not be exposed to the vagaries of the stock market.

This may, however, require a change to the EPF Act 1952, as it does not allow the fund to pay different rates of interest to different members in the same financial year. The finance ministry has proposed allowing PF trusts to invest up to 5% of their incremental deposits in equities and up to 10% in mutual funds (MFs).

The advisory notification will now be taken up by the labour ministry, which is the administrative ministry for EPFO and the exempted PF trusts, for further deliberations. The ministry will draw up the guidelines for the proposed equity market investments by PFs.

Government sources said unions have said that since returns on stock market investments fluctuate, depending on the time frame, employees who are near their super-annuation should be given an option. The option would allow them the leeway to decide whether or not they want part of their accruals to be invested in stocks.

“Unlike debt instruments, which would give uniform rates of return to all PF members irrespective of their service period, investments from stocks would vary, depending on the timeframe of investments,� said a fund manager in an MF.

Finance ministry officials said they have no role to play in the matter, as it is the Central Board of Trustees of the EPFO which will decide on the investment pattern. They also said that since the proposed changes apply only to incremental deposits of members, the impact of any change in share prices on total payout would be small, especially in the initial years.

But union members said, on a psychological plane, exposing older members of the EPFO to stock market volatilities would be unwelcome. Some of them said a cut-off year could be considered before the new investment avenues are announced for the fund.

After the finance ministry ratified the 9.5% interest rate for payouts in ‘04-05, ‘03-04 and ‘02-03, it is almost foregone that the CBT will accept the new investment pattern. This was also indicated by labour minister K Chandrashekhar Rao.

The finance and investment sub- committee of the EPFO will meet on February 20 and 21 to work out the financial implications of the new investment pattern, and therefore the subsidy that the fund may need to meet its redemption pressure for its 2.7 crore subscribers.