LEFT WANTING / Dec 13, 2005 / The Telegraph
From Indiapensions
LEFT WANTING
There must be no going back on the decision to reduce the interest rate on the employees provident fund scheme to 8.5 per cent. Even the 8.5 per cent rate will leave the fund with an uncovered deficit of Rs 366 crore. Retaining the rate at 9.5 per cent, as demanded by the left and the opposition, will lead to a gaping hole of Rs 1,176 crore that can only be filled by a subsidy from the government. And using taxes collected from the vast majority of the population to fund retirement benefits for organized labour, who constitute less than 10 per cent of the workforce, would be extremely unjust. What is more, it is well-known that out of the 4 crore workers who will be affected, about 75 per cent have less than Rs 20,000 in their accounts. In any case, now that inflation has declined so much, it is obvious to everybody except the left that interest rates too need to go down. Moreover, the government has already brought down the rate of interest on small savings, including on the public provident fund scheme and there is no reason why the EPF should continue to be a small island of high returns.
Experts have for long been calling for a link between the provident fund and small savings rates with market rates of interest. When market rates rise or fall, interest rates on the provident fund too should rise or fall. But that is only half the issue - any reform must also take into account the fact that the EPF has been a miserable failure in assuring a decent retirement benefit to workers. Further, the employees pension scheme faces an even bigger potential problem, with the payouts being far larger than its earnings. The hole in its books was estimated at around Rs 22,000 crore for 2004, and it must have moved up even more since then. Clearly, therefore, there is a crying need for pension and provident fund reform. One way of increasing the yield would be to allow the funds to invest in the equity markets - pension funds in the developed countries have more equity in their assets than debt. At the same time, investment options have to be given to workers to fit their risk profile - the risk-averse, for instance, may choose pure debt schemes. The government is aware of the need for change - the pension fund regulatory development authority bill is proof of that, but unfortunately the left has so far not come aboard. It is high time the left realizes that the present system is unsustainable and workers' savings are at serious risk.
