Why EPF should deploy its funds in diverse assets

The central government reportedly wants the Employees’ Provident Fund Organisation (EPFO) to sell shares and use the capital gains to increase the payout for its subscribers. This is the right thing to do, with the Sensex crossing 35,000 and closing at 35,798 on Monday. The EPFO, which manages workers’ retirement funds, should go ahead and book profits on share purchases to give subscribers a decent rate of return. Clearly, this shows the utility of investing in shares. Exiting the market when the returns are high makes eminent sense. Investment rules, which mandate the EPFO to park a large slice of funds in safe harbour government bonds and only up to 15% in equities, must be reviewed.

The case to raise the 5% cap on investment in real estate investment trusts, for instance, is compelling, as India begins to urbanise in real earnest. The EPFO should expand the asset classes it invests in, to private equity, and venture capital — the latter, along with, say, Sidbi’s effective venture fund. It should set up a special situations fund to take advantage of one-off opportunities. Investment in stressed assets being auctioned off under the Insolvency and Bankruptcy Code resolution process is a huge opportunity. Specialised buyout funds, for example, had emerged in the US, making windfall gains by turning around distressed companies. India must create a competitive market for distressed assets that would enable pension funds such as the EPFO or the National Pension System (NPS) — which manages pension contributions of civil servants who joined service January 2004 onwards and also of voluntary subscribers — to invest in distressed assets.

The NPS offers returns superior to the EPFO’s. So, it is imperative for the government to implement its decision to let workers move their mandatory savings from their salaries to the NPS, if they choose to do so. Competition will push the EPFO to managing workers’ savings better by investing in asset classes that command a claim on the economy’s productive capacity. The pensions regulator should remove restrictions on risk diversification.