Another UTI?

Even as reports suggest the government has made a tidy sum on US-64, thanks to the bull run in the share markets, a series of reports suggest the next UTI-type collapse that’s readying itself is going to emanate from the Employees’ Provident Fund Organisation (EPFO).

For one, the government will have to shell out more than originally envisaged on account of the Employees Provident Fund (EPF), on which interest rates have been raised by one percentage point—because many privately-run funds are planning to hand over their money to the EPFO, as they can’t possibly generate the higher returns the government has mandated.

Since they are required to make good any shortfall if they continue to run the funds, why not hand them over to the EPFO?

The second problem is with the Employees Pension Scheme, also run by the EPFO. Since this scheme (which offers to pay a pension equal to half the average of the last salary drawn one year prior to retirement) was drawn up when interest rates were twice as high as they are now, it is deep in the red already.

If the scheme, with a corpus of around Rs 53,000 crore, is to be closed today for new entrants, but existing entrants continue to make their payments and get all benefits till their death, the scheme will have a shortfall of Rs 19,300 crore in 2002-03 (the figure was Rs 17,100 crore in 2001-02).

The gap pertains to a very long period over which the scheme gets funds and gives out pensions; discounted to today’s value the gap works out to around Rs 3,000 crore, according to senior EPFO officials.

While the EPFO has been asking the government to allow it to change the original provisions, the funding gap can get only bigger if interest rates continue to stay low. Actuarial calculations by the EPFO suggest that if contributions by employees are raised from the current 8.33 per cent to 10.33 per cent, the scheme may be able to break even.

Other suggestions include changing the definition of the “last salary” from the average of just the last year to the average of the last five years of employment, and perhaps raising the retirement age to 60 so as to increase the number of years of contributions to the EPS by two and simultaneously reduce the number of years in which a pension is to be paid.

While all political parties, not just the Left, are certain to raise a furore if retirement benefits are reduced, the government needs to act on the EPS with urgency—if retirement benefits are not curtailed now, the entire scheme may go bust like UTI did, and the government will then have to make good all the pension commitments.

An added reason for why action needs to be taken now, is that the EPS was started when Manmohan Singh was the country’s finance minister.