“Employees’ Provident Fund” (EPFO) is currently in a dilemma on whether to focus on the higher income strata or target the lower waged population.
Its board of trustees are currently in a fix regarding these conflicting objectives and proper clarity and direction is yet to emerge from them.
What is the context of the conflict?
At times, EPFO is seeking to position itself as a closed-end stable contributory social security net for lower income workers.
But at other occasions, it sees itself as a market-linked generous retirement kitty for the well off.
Withdrawal Option:
Limit - In 2016, EPFO was forced to roll back its decision to restrict early withdrawals after nationwide protests.
Currently, it is moving in the opposite direction by further easing norms, allowing up to 75% withdrawal after the very 1st month without a job.
Even the residual 25% can be withdrawn, if one remains without work for more than two months.
Conflict - These changes are likely to cheer affluent classes who are looking to take a career break to pursue higher education or start their own venture.
But then, it may do serious harm to the social security of lower-income employees who make up the majority of the EPFO’s member base.
Given the churn in India’s jobs market, sudden job losses are an ever-present threat for workers on the lower rungs of the income ladder.
For workers who are at the middle or fag end of their careers, the leeway to withdraw 75%, will affect their retirement package.
Investment Risk:
Options - EPFO’s 15% equity allocation is now being invested mainly in Sensex 30 and Nifty 50 ETFs (top shares in India’s Share Markets).
Central PSU shares and Bharat-22 ETFs (a conglomerate share of “multiple shares across sectors”) is the other option where money is invested.
The Fund is now proposing to add stocks beyond these blue chip names in the hope of bumping up its returns.
Conflict - Higher-income earners in the PF fold may not mind taking on higher market risks for higher rewards.
But many EPFO members may not share this sentiment, and there is also fear that EPFO (like LIC) might become a bail-out for stressed public companies.
What is the way ahead?
Higher income earners already have multiple market-linked vehicles to choose from to build their retirement kitty.
It would be best for the EPFO to clearly position itself as a basic social security net for India’s less-affluent workers.
In this context, high end employers could be given the leeway to opt out of EPF and offered a menu of market-linked options to further their retirement needs.
