What ails the PF body

The United Progressive Alliance government seems to be making headway at long last on pending reform issues. First came the breakthrough on divestment in non-Navratna undertakings, and then the raising of the foreign investment limit for telecom companies (promised many months ago in a Budget speech).

Now comes the decision to lower the interest rate on balances with the Employees' Provident Fund (EPF). It is true that the decision to pay 8.5 interest rate for the current year will require an additional Rs 366 crore (Rs 3.66 billion) that the Fund does not have (if Mr Chidambaram doesn't provide for it by hiking the borrowing rates that the government pays on these funds -- and there is no reason why he should).

But this is much better than what the unions were demanding -- a continuation of the 9.5 per cent interest rate, which would have led to a Rs 1,176 crore (Rs 11.76 billion) hole in the books.

It may be recalled that Prime Minister Manmohan Singh had warned early on about the danger of the EPF going the Unit Trust of India way by paying out money it did not have, and the fact that even at the new lower interest rate, such pay-outs will continue shows how difficult it has been to get the Left to accept basic financial logic--that interest rates must fall when inflation rates do.

As it is, it will be an uphill task to find this Rs 366 crore since the EPF Organisation's (which comprises the EPF and the Employees Pension Scheme) constitution does not allow it to pay funds which are not earned by it. The last time round, an accounting fudge allowed it to withdraw Rs 715 crore (Rs 7.15 billion) from a Special Reserve Fund (which comprises unclaimed monies), but that reserve is now down to Rs 144 crore (Rs 1.44 billion).

The larger problem with the EPFO is not just the interest rate (which is externally determined) but the fact that the organisation has antiquated book-keeping methods (a single- entry system that seems to permit a growing problem of theft), and the quality of service is poor.

There are a large number of cases where, for years, balances have not been updated and members informed. One internal EPFO document, for instance, says that the fund had Rs 8,313 crore (Rs 83.13 billion) in the "interest suspense account" in 2002-03, of which Rs 2,360 crore (Rs 23.60 billion) was brought forward despite not being reconciled in appropriate accounts.

In other words, the figures on the basis of which calculations are being made are suspect. In another case, while the EPFO balance sheet for 2002-03 said the payout during the year was Rs 5,506 crore (Rs 55.06 billion), the annual the solution lies in making the pension benefits less attractive, perhaps by increasing the age of retirement by 2-3 years (this will increase the years of contribution to the fund and reduce the years of drawing pensions from it), report said it was Rs 6,621 crore (Rs 66.21 billion)!

The Employees Pension Scheme is another major problem area since the hole here is estimated at around Rs 22,000 crore (Rs 220 billion) for 2003-04, and growing by around Rs 3,000 crore (Rs 30 billion) each year because the fund promises a pension equal to half the last salary drawn, whereas interest rates have fallen dramatically since the time the scheme was introduced (ironically, when Dr Singh was the finance minister).

While the EPFO's board has not even considered the actuarial valuations of the hole in the EPS for the last three to four years, so a decision on how to fix the hole has not even been considered.