Talk before you shoot

EPFO's problems aren't that intractable

What initially appeared like an open-and-shut case is now embroiled in an unseemly inter-ministerial battle. A few months ago, the trustees of the Employees Provident Fund Organisation (EPFO) had recommended that its members would get a 9.5 per cent interest on their deposits for the current financial year. This was a welcome increase of 100 basis points, though the reason cited by the EPFO in defence of the interest rate increase was the fortuitous discovery of surplus money available in its interest suspense account. The auditors had duly qualified this discovery pointing out that it could not verify the available surplus until the EPFO updated the accounts of all its 47.2 million members. This was the primary reason the finance ministry cited while rejecting the rationale for increasing the interest rate on EPFO deposits for 2010-11. The finance ministry also raised another objection, namely that the EPFO followed two systems of accounting — recording its income on an actual receipt basis and its liability (interest payments to members) on an accrual basis.

Not taking such objections lying down, the labour ministry has shot back with a rebuttal that on the face of it seems strong and convincing. It has argued that updating the accounts of 47.2 million members would make no difference since the total corpus on which it has to pay interest will be the sum of all these individual accounts, which the EPFO has already considered. The labour ministry has also repudiated the finance ministry’s suggestion that the EPFO followed two accounting principles, reiterating that both its income and liability are recorded on an actual basis. Moreover, it has argued that a higher interest payment at the rate of 9.5 per cent for the current year is sustainable since about half its total funds were invested in securities that yielded an annual return of nine to 14 per cent. What made matters appear a little intractable was the fact that both the secretaries – representing the finance and labour ministries – had invoked their respective ministers and their support while arguing their cases. Worse, national labour unions have now joined the battle noting that the finance ministry had no justification for denying the workers a higher rate of interest earned on their deposits.

There are many lessons that the government ought to learn from this spat. Only a couple of kilometres separates the office of the Union labour secretary from that of the Union finance secretary. A conversation between the two officials may have helped clarify matters that badly drafted notes can never do. A rise in the interest rate on EPFO deposits to 9.5 per cent would pressure the government to raise the administered interest rates on other similar deposit schemes run by the post offices or the Public Provident Fund. There is also the political difficulty the government would face next year when it may have to reduce the interest rate. It is these concerns that needed to be discussed and thrashed out. Passing the buck to the ministers to decide such a contentious issue, as has been suggested by the warring officials, may not always bring out the best results. There is an urgent need for modernising the accounting system the EPFO is following at present and for addressing larger concerns on whether it can meet the rising pension liabilities for its 47.2 million members. With so much to be done, avoidable controversies ought to have been avoided.