Give people the option to opt out of the EPFO and become part of the New Pension Scheme
The pension regulator exhorting companies to offer their employees the New Pension Scheme (NPS) is clearly working since over 300 firms including Reliance, Wipro, Cognizant, Pantaloon, ICICI Bank, Axis Bank and Kotak Mahindra Bank have enrolled new and existing staff under the NPS facility. Given the relatively better returns NPS offers compared to the Employees Provident Fund Organisation (EPFO), that’s not surprising either. In even the case of NPS for government employees where a maximum of 15% of the corpus can be invested in equity, subscribers got a return of 9.95% in FY12, 11.35% in FY11 and 13.05% in FY10 while the EPFO offered 8.25%, 9.5% and 8.5% in these years. The returns offered under NPS Scheme-C (where majority of the investment goes into corporate bonds) were over 11% while Scheme-E (where up to 50% is invested in equities) ranged from 8.35% to 28.6% in the last three years. Once you factor in consumer inflation, in fact, EPFO is yielding a negative return.
If this isn’t bad enough, around a third of EPFO accounts are inoperative, with balances of around R22,000 crore—this means workers who’ve put in their hard-earned money over the years haven’t been able to withdraw their funds thanks to the EPFO bureaucracy. Account portability still remains a dream and while EPFO balances can now be viewed online, though with a lag, transfers from one account to another still take several years and consistent follow up. In the case of NPS, however, where this doesn’t happen, account holders are free to choose their fund manager on the basis of track record, switch the manager and even decide on where the investments are to be made. And for those who are not investment-savvy, there are default options where, depending on how old you are, investment strategies are fixed. For starters, it would be a good idea if the PFRDA chief was able to convince the government that investing in EPFO must be made voluntary instead of mandatory at present—that would give investors a genuine choice.