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PF Portability - Cost-benefit Analysis

PF Portability

Good times are on the anvil for the hitherto harassed employees of the organized sector in India. While there has been an endless debate on mobile portability, PF portability is on course for a quiet, unceremonious debut. Come October 16, one will soon be able to make career moves across states, companies and domains without being bogged down by the thought of transferring money held in the provident fund. If the hitherto moribund Employees Provident Fund Organisation(EPFO) is able to deliver on its ambitious promise to provide portable Universal Account Numbers (UAN), a subscriber (employee) would be allotted a centralized number on the lines of a savings bank account to channelize all the PF dues irrespective of the number and change of employers.

The Past

Going by the established practice in independent India, every new employee was given a PF number and one was expected to transfer money from the old PF account into the new one. People would prefer to withdraw the amount as transferring accounts from one employer to another was a cumbersome process, involved a painstaking waiting period and a loss on the interest accrued in the interim period. 

Looking Ahead

A universal account number will allow portability of provident fund number. The PF subscribers (employees) would be allotted a one-time UAN, or Universal account number, linked with the PF account. On joining a new company, employees would be given a new member-id linked to the UAN. The employees will also have a custom-made login id to view transfer claims and update their personal details on the site. The UAN number will simplify the funds transfer process, associated with the job change, thereby making the PF account portable for the 4.17 crore contributing subscribers of EPFO. The employers will be allotted LIN after registration on the website and this will operate through a unique LIN (ShramPehchanSankhya) for each employer.

Cost-benefit Analysis

In the organized sector, a certain sum is deducted from employees' salaries and there is a commensurate contribution from the employer towards the workers' retirement funds. A total of 12% of the monthly salary goes into the EPF account and the employer contributes the same amount. Of the employer's contribution, 8.33% goes into the Employees' Pension Scheme, which offers pension after the age of 58 years. The move towards PF portability would enable the employees / workers to retain their provident fund savings even after changing jobs and enjoy uninterrupted gains on their corpus, as the PF accounts deliver compounded annual returns of 8-9%, depending on the prevailing market situation. (The EPFO declared an interest rate of 8.75% for FY14). The withdrawal, after five years, would be completely tax-free and one need not be in the same workplace throughout the period. More importantly, the rate of PF returns are at par with other debt market instruments. The permanent PF account number will also enable the non-formal construction and other workers, who make frequent changes in contractors and workplaces, to enjoy social security benefits.

Getting a slice of the Equity pie

The major chunk of the EPFO corpus is invested in defensive government bonds and less than a per cent in bonds issued by the private sector.The EPFO can invest up to 5 per cent of its corpus in money market instruments, including mutual funds and equity-linked schemes, according to the overseeing labour ministry. This could result in a sizeable infusion of liquidity into the equity space.  However, EPFO has not yet warmed up to the idea and for obvious reasons.

Gains and pains

There is a perception that equities consistently outperform government securities over the long-term horizon. Moreover, it is believed that investing a small chunk of the PF money into the stock markets will support prices and confidence levels, and boost the capital markets as a whole.  However, this is far from the truth.

While equities tend to outperform government securitiesover the distant horizon, the day-to-day fluctuations in stock price movements could ruffle many a feather in the short term. Given that most of the PF contributors belong to the lower rung of society, where PF money constitutes their only mode of saving, the damage could indeed be life-damaging and irreversible. 

The theoretical notion that equities surpass government securities in performance may turn out to be far-fetched as the EPFO fund managers entrusted with stock investment decisions may not always enjoy a free hand in making the right investment choices, given the conflicting political pulls and pressures.

The possible entry of EPFO also carries the danger of market manipulation. As the Employee's Provident Fund organization will be a major market player, just as Unit Trust of India, there is a real risk of businessmen successfully colludingwith politicians connected with EPFO to muddy the waters for the small investor who takes the EPF route to market investing.

Moreover, the transfer of PF money into equities could translate into higher interest rates and the resultant rise could lead to more bond buying (and equity selling), defeating the very exercise of giving a fillip to the equity bourses.

The matter seems to be settled ,atleast for now.

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