PF rate increase to impact firms with own trusts
NEW DELHI: The government’s decision to raise the Employees Provident Fund (EPF) rate to 9.5% this fiscal could hit the bottom line of 3,000 firms running their own PF trusts. These trusts may find it difficult to bridge the gap between the actual income on their PF investments and the mandated rate, forcing them to dip into their company’s profits to make up for the deficit, according to a study by The Economic Times. ET studied portfolios and income estimates of 63 PF trusts with assets of Rs 6,520 crore. While most trusts will earn 8.5% return on their investments, some will get returns of as low as 7.8%. Just one in nine trusts will earn over 9%, while none will be able to pay 9.5% from this year’s earnings.
“The way things stand, this gap between PF trusts’ income and 9.5% would have to be funded by employers,” said Amit Gopal, vice-president at India Life Capital, which advises several large corporate retirement funds. Most trusts do not have any reserves left, as the PF rate has been set higher than investment earnings for most of the last seven years. The few firms that have the reserves, are barred from using them to pay interest to subscribers under new regulatory norms issued by the Employees Provident Fund Organisation (EPFO) this year. So, the only alternative with the PF trusts is to seek funds from the parent company. At an EPFO board meet earlier this month, at least two trustees expressed concern over company-run PF trusts’ ability to match the 9.5% largesse from the EPFO. But the EPFO is not buying this argument. The retirement fund manager claims that these trusts have ample reserves, which they could use to fund the shortfall. “Some of these PF trusts are very healthy,” Central PF Commissioner Samirendra Chatterjee told ET. “They get higher returns than us as EPFO’s internal norms are tighter than the investment pattern. They can dip into their reserves,” he said.
The PF commissioner’s confidence stems from an internal survey commissioned by the EPFO in October 2010. The EPFO studied 10 PF trusts, including those run by Tata Motors , NTPC, Dabur India, Gillette India , Cochin Shipyard and the recently-listed Manganese Ore India Ltd. It found that all of them had enough reserves to spruce up their workers’ PF income by 1%-9 %. The EPFO is expected to earn about 8.5% interest on its investments in this financial year. But it set a 9.5% PF rate after it located some reserves that had built-up in its poorly maintained records since 1952.
The retirement fund manager had stated that company-run PF trusts follow the same accounting practices and invest in the same basket of securities. So, these trusts must also be sitting on similar reserves and can match the 9.5% rate. But most company-run trusts do not follow EPFO’s ‘archaic’ accounting style, which relies on a dated cash accounting system with single-entry book keeping. And reserves are running low, if not completely exhausted. “For most of the last decade, the PF rate has not been an accounting decision based on income,” said Bhupendra Meel, associate vice-president (retirement trust solutions) at A K Capital Services. “Earnings on PFs’ primary investments – government and public sector debt – have been consistently lower than the PF rate.”
The last three fiscals saw the average yield on incremental investments go marginally above the prevailing PF rate of 8.5%. So, the newly-formed trusts might have some reserves, but only a few old ones would have any surplus. “From 2000 to 2006, PF trusts only bought securities with yields lower than the prevailing PF rate,” said Gopal. “In most of these years, they had to dip into their reserves, which are now depleted,” he explained.
Even if a PF trust has the reserves to bridge the gap between its income and the 9.5% rate, it cannot do so. As per new norms issued by the EPFO, employers are not allowed to use PF trusts’ past reserves for bridging such income gaps. “The employer shall be liable to make good the loss/interest,” said a circular issued in May 2010 to company-run PFs.
In October, the EPFO issued a clarification that trusts could use their reserves for “extending benefits to the members in terms of enhanced interest payments” . But company-run trusts are not sure if this means reserves can be used to match the PF rate. “This implies that we can pay a bonus to workers over and above the existing PF rate,” a PF trustee with a leading consumer goods firm said. “There’s still no clarity on using reserves to meet the shortfall between our income and the 9.5% rate.”
Source: Economic Times