Accounting for errors

EPFO must set its own house in order

About 50 million private sector employees have earned a percentage point increase in interest income from their deposits with the Employees Provident Fund Organisation (EPFO) simply because one of its trustees detected a calculation error, apparently being made for several years, and quickly corrected that to provide additional funds to take care of a higher interest payment burden. This is Kafkaesque not just because of the manner in which it happened but also because of the uncomfortable questions it has raised about the governance and safety of these funds. Employees and members of the central board of trustees, overseeing the EPFO, were mentally prepared to accept an 8.5 per cent interest rate on its accumulated deposits during 2010-11, as the Organisation did not have the necessary funds to meet the demand for a higher rate. On Wednesday, however, the EPFO discovered a calculation error in the interest suspense account that, after the correction, stood at Rs 1,731 crore, instead of Rs 157 crore estimated earlier. That amount was sufficient to finance the one percentage point increase in the interest rate EPFO pays to its members for the current year, making it the most attractive savings scheme with a tax-free return that is almost double of what one gets from banks.

 

The celebrations over a higher interest rate on EPF deposits, however, need to be tempered with the realisation that the benefit is financially not sustainable. The detection of a calculation error in the interest suspense account has given the EPFO only a one-time gain. In the normal course, therefore, maintaining a 9.5 per cent interest rate next year would not be feasible. So, using up almost the entire additional fund in the interest suspense account to finance an increase in the interest rate for one year has made the task for next year even more difficult. The trustees may still find some extra resources to maintain the current year’s interest rate, as they have decided not to pay interest on accounts that remain inoperative for more than three years. Considering that about 60 per cent of the accounts are inoperative and have an accumulated deposit of about Rs 15,000 crore, the move may yet again provide some additional funds next year to raise hopes of maintaining the interest rate at the current year’s level. But that once again would be financially imprudent as the trustees have simultaneously approved a proposal to pay up the entire accumulated interest amount on all such inoperative accounts if and when their claims came up for settlement.

A wiser course could have been to use the money available under the interest suspense account for bringing about the much-needed changes in the manner in which the EPFO maintains its accounts so that they become more robust. The sudden discovery of the calculation error has made the EPFO’s 50 million members wonder about the safety of their deposits. There is no reason why the EPFO should not digitise its accounts, subject them to rigorous audit checks and make them accessible to all its members online. Why should the EPFO allow the number of inoperative accounts to grow from 20 to 30 million in the last few years? Urgent attention also needs to be paid to issues related to training the large workforce the EPFO has and upgrading the technology it uses. Until the EPFO fixes these basic problems pertaining to its financial housekeeping and overall governance, it would be unwise for it to contemplate investing in the stock market to grow its returns.