EPFO panel to discuss investing in equity markets on Tuesday

Proposal by finance ministry involves risk, says panel; trustees to also consider other finance issue next week

A sub-committee of the Employees’ Provident Fund Organisation (EPFO) has suggested a proper risk evaluation mechanism if the retirement fund body decides to invest  some of its  funds in the equity markets.

A decision on venturing into equity markets will be taken at a meeting of its Central Board of Trustees (CBT) on Tuesday. It will discuss the revised investment patterns proposed by the finance ministry, which has an option to invest funds in direct equity and index funds.   

EPFO had formed a four-member committee to prepare a report examining this revised investment pattern draft, issued by the finance ministry in June. Sources told Business Standard the committee has said that investing funds in the equity market will involve a definite risk.

“Equity is a different animal. One can adopt proper internationally accepted policies available in countries like Singapore and be a big player in the market but risk evaluation should be kept in mind for that. The committee has said that you can look for different investment avenues but be ready for the risk,” an official said.

In 2008, the CBT had rejected a similar suggestion from the finance ministry on investing a portion of funds in the equity market. The ministry had pressed that EPFO do so CBT had turned down the suggestion,  saying this involved exposure to market fluctuations.

The revised investment pattern suggested by the ministry includes investing up to 40 per cent of the funds in government securities from the present 55 per cent, up to 15 per cent in direct equity and up to 15 per cent in index funds. The recommendations sought  to keep  the existing pattern  of investing up to 40 per cent in some  debt securities and up to five per cent in money market instruments.  

This apart, the Finance Investment and Audit Committee of EPFO has suggested that investment issues without clear objectives are leading to sub-optimal returns. Its recommendations will also be taken up in the Tuesday meeting.

The meeting will also decide on fixing the interest  rate for its subscribers for 2014-15. It had given an interest rate of 8.75 per cent for 2013-14.

CBT also has to decide on the suggestion by actuary firm K A Pandit, appointed to conduct the annual valuation of the Employees Pension Scheme (EPS). The firm has suggested EPFO look into investment return cautiously and not increase the benefits without consulting actuaries.

It said any enhancement of salary ceilings to avail of the benefits of various facilities provided by EPFO would mean the EPS scheme has to be revised accordingly.

The Centre had recently increased the mandatory wage ceiling of subscription to the EPS scheme from Rs 6,500 to Rs 15,000 a month and also notified a minimum pension of Rs 1,000 a month to all EPS subscribers.