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Dear EPFO, where is my interest?

If there is a delay in crediting interest by, say, four months every year, over a work career spanning 25 years, it implies that for 100 months the interest on balances was not earned, which reduces retirement income.

October 05, 2022 / 08:26 PM IST

The Employees’ Provident Fund Organisation (EPFO), set up in 1952, is among the major public social security organisations in the world.

In 2021, EPFO managed assets worth Rs 15.7 lakh crore (7.7 percent of 2019-20 GDP of Rs 203.3 lakh crore); had 69 million members; provided pensions to 7.1 million persons; and settled over 37 claims. (Source: Nirbadh_EPFO_to_e EPFO.pdf (epfindia.nic.in).

As India is experiencing moderately rapid ageing; and with advances in Fintech and India’s drive towards a digital economy, there is much greater urgency to ensure that the EPFO modernises its governance, investment and other processes to enable its members to better cope with ageing; and to continue to be relevant.

Estimates by the United Nations project that India’s elderly population (65+) will increase from 48 million (4.5 percent of the population) in 2000 to massive 256 million (15 percent) in 2050; and in the same period working age population (21 to 64 years) will increase from 512 million (48.4 percent) to 990 million (59.2 percent).

With increasing formalisation of the labour force, demands on EPFO’s governance structures and on its work processes will grow enormously.

Also read: How EPFO invests its funds and credits interest income

The issue of delay in crediting interest to members

Over the years, there has been a persistently long time lag between the time EPFO's Board of Trustees decides on the rate of interest for the financial year and the time the interest actually gets credited to the accounts of the members.

Take the 2020-21 interest cycle. The interest of 8.5 percent was decided by the EPFO’s Board of Trustees in March 2021. This was notified by the EPFO to members by a circular in October 2021. But the interest rate was credited in December 2021.

The gap between March and December was nearly nine months, an extraordinary delay.

Earlier this year, it was reported that interest for 2021-22 was supposed to be credited by July 2022, still a gap of about four months.

Also read: Why EPF interest credit to your accounts gets delayed every year

Why does this delay occur?

The root cause of the delay is that the EPFO has not followed the global norm of paying interest to members on the basis of its market-related earnings. Instead, the EPFO has relied on the administered rate of interest, exemplified by declaring interest rate in March, which is before the end of the financial year.

This reliance has meant that the EPFO, even after 70 years of operations, does not have an in-house investment team which can act as a check on mandates to the external fund managers.

Another major reason for the delay is that the EPFO under the Ministry of Labour and Employment needs to get approval from the Ministry of Finance (MoF) for the interest rate it proposes.

This is because this step involves a substantial sum and all the contingent liabilities (in case EPFO does not have enough income to pay the interest), and the EPFO's rate could create imbalances among different saving instruments which have larger implications for the financial and capital markets.

The approaches of MoF and EPFO to financial matters are different. Moreover, MoF needs to check the financials of the EPFO, requiring format and depth that EPFO’s management information systems may not readily provide.

Also read: Your one-stop guide to all things employees' provident fund (EPF) 

Explaining the loss to EPFO Members due to the Delay

The loss to EPFO members due to the delay in crediting the interest can be explained by an example.

Assume Rs 1,000 in interest to a member is due by EPFO for say FY 2021-22 ending on March 31, 2022. But this Rs 1,000 is paid on July 31, 2022. This is where the time value of money and opportunity cost become relevant, as his Rs 1,000 is due by March 31, 2022, but it is not received in the members' accounts till July 31, 2022.

The Rs 1,000 credited in a member's account in July has a lower real value than that credited in March due to the time value of money.

Moreover, because of this delay, the member is not able to utilise this Rs 1,000 for four months for permitted purposes.

It is accepted that at some point in time after March 31, 2022, by which date this Rs 1,000 interest is due, this amount will be received in the member's EPFO account. But this will be in nominal not real terms.

But the burden to members in terms of the lower real value of this Rs 1,000; and of opportunity cost in terms of deploying this Rs 1,000 remains. As this occurs year after year, the cumulative burden to members is significant over the work history.

Globally, provident funds pay interest the day after the financial year is over. For instance, Malaysia's financial year is January-December. But in Malaysia, an annual dividend (interest) payout is credited on January 1 every year, based on the savings of members. (Source: https://www.kwsp.gov.my/member/overview#InvestmentDividends Accessed October 5, 2022)

Some have argued that the delay in crediting the interest by EPFO is similar to the salary hike announced in August but paid in January, which does not involve financial loss. But this is not a relevant example as hikes are paid when promised. If promised salary hikes were delayed by a few months, then the similarity would be there, with the time value of money and opportunity costs leading to a loss.

What can be done?

A short-term, stop-gap measure would be to credit between 60 and 65 percent of interest declared by the Board of Trustees within less than a month, with some safeguards. The rest could be paid when MoF approval is given.

In recent years, the EPFO has made efforts to improve services to members. But a political decision is needed to transform it into a modern professional social security organisation, with greater powers and accountability. This would include modern investment management practices (National Pension Scheme Trust, or the NPST, has shown how this can be done), with a mandate to pay interest from its investment earnings. '

The EPFO should be transformed into an autonomous organisation with modern governance structures and needed skillsets and technology, operating under prudent and transparent rules and regulations.

India is well on its way to attaining a $5 trillion economy status and is aiming higher. It has ambitious FinTech and digital economy goals. EPFO’s current governance structures, skillsets, investment management and work process are not in tune with the country’s ambitions and with the aspirations of its members. It is time for the structural reform of the EPFO.

(The article has been updated with greater elaboration on how an EPFO member stands to lose due to a delay in crediting interest by the provident fund body)

(The writer is a Professorial Fellow (retired), Lee Kuan Yew School of Public Policy, National University of Singapore)
Mukul Asher is Senior Associate, Executive education, Lee Kuan Yew School of Public Policy
first published: Oct 5, 2022 10:59 am