The defined contribution pension plan most widely available in India, the state-run provident fund, has stumbled upon Rs 1,700 crore that it intends to pay its members as a bonus this year in an extra percentage point interest. But this is a one-off, unless more such goodies are lying undetected in suspense accounts. Although the employees’ provident fund defines contributions on paper, it has morphed into a defined benefit plan where the returns are declining over time. The world has realised it is time to retire the defined benefit pension that worked as long as far more people were joining the labour pool than were leaving it. By 2020, the average Indian will be 29 years old, with 30 years of work ahead of him. Enough to pay for his father’s pension, but he will leave a load heavier than he inherited as population growth eventually slows.
Every one of the 47 million contributors to provident funds today has the freedom to save more and to choose where these savings are invested. Available pension products cater to a broad range of risk appetite, from treasury bonds to equity markets. The returns can safely be expected to be higher than the 8.5 per cent the Employees’ Provident Fund Organisation — bound by law to invest only in debt issued by the government or its enterprises — offers its customers on the Rs 317,000 crore it has invested on their behalf. In comparison, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the US, had a composite return of 260 per cent in three years since it began investing $1 billion (Rs 5,000 crore) in Indian stocks in 2004.
The naysayers appear to have the upper hand in the drawn-out debate over whether the Employees’ Provident Fund Organisation should be allowed to invest as little as 5 per cent of its corpus in the stock market. Just about 15 per cent of India’s provident fund corpus is held by 85 per cent of its contributors. This weighs in against the move to earn better returns on the funds invested. The trade unions warn of vulnerability to market risks of the overwhelming majority of provident fund contributors who have accumulated under Rs 20,000 in the scheme. The government, on the other hand, finds little to justify subsidising what is essentially a middle-class perk: barely one in ten of the country’s 422 million workers pays into a provident fund. So hope for more piles of cash being unearthed if you want a higher return on your provident fund account.