8.5% interest rate to stretch EPF coffers

The decision of the Employees’ Provident Fund Organisation (EPFO) to pay 8.5 per cent interest rate to its 42 million subscribers will nearly wipe out its contingency reserves. This is because any payment at a rate more than 8.39 per cent will have to be drawn from contingency reserves, which currently stand at Rs 150 crore, according to EPF commissioner K Chandramouli.

Contingency reserves of the EPFO are created by allocating a portion of the total interest earned on deposits.

At the end of the current fiscal, the contingency reserves will reduce to just Rs 11 crore, as a difference of 11 basis points (one basis point is one-hundredth of a percentage point) for 42 million subscribers will result in a loss of Rs 139 crore a year, he said.

This is not the first time the EPFO has drawn from its contingency reserves. In fact, it has drawn from them during the last two years.

Despite getting more than what EPFO earns, the trade unions are unhappy, insisting that the interest rates could have been increased beyond 8.5 per cent. Their representatives in the EPFO board had demanded a rate of 9.5 per cent for 2008-09 and had also registered their dissent in the meeting that decided the new interest rate.

Hind Mazdoor Sabha general secretary A D Nagpal, a member of the Central Board of Trustees of the EPFO, said: “The government only has the contingency reserve of Rs 150 crore to bank upon. But its policies are responsible for the returns the subscribers get on the Special Deposit Scheme (SDS), where the EPFO has parked Rs 42,000 crore. It can increase the interest rates as these are deposits for a life-time. Even banks give 9.5 per cent when money is deposited for two to three years.”

He said the government had consistently kept the interest rates for SDS low, even when the rates elsewhere were higher. When banks were giving 16 per cent, the SDS was only paying 12 per cent (when it was started in 1975). So it ought to return that money to the subscribers, he added.

Again, government securities fetched higher interest rates of over 8.75 per cent before the recession set in, he pointed out. Currently, the 10-year government bond is quoting between 6 per cent and 7 per cent.

The EPFO says that the fund by its very nature is a self-sufficient one and is doing what it can with the available resources.