Accounting mess behind EPF rate cut

  • Dhirendra Kumar
  • |
  • Updated: Mar 18, 2012 21:02 IST

Two days before the Budget, the Employees Provident Fund Organisation (EPFO) decided to cut its returns for 2011-12 sharply, from 9.5% the previous year to just 8.25% now. Although the decision prompted some protesting statements from labour representatives, they were inevitably overshadowed by the Rail Budget drama and then the Union Budget. Perhaps the timing was part of the plan. However, at some point there are bound to be some more serious protests.


For once, they will be justified. In the current interest rate environment, 8.25% is definitely below par. Currently, Public Provident Fund (PPF) delivers 8.6% and national saving certificate (NSC) 8.7%. Bank deposits earn above 9%. However, as some news stories have revealed, the reasons behind the EPF rates’ sharp drop are actually more worrisome than the drop itself.

Readers will recall that last year, the EPFO was heading for an 8.5% return when it fortuitously discovered a surplus Rs 1,750 crore lying around somewhere. In an astonishing coincidence, this sum proved to be exactly what was needed to pay out 9.5% instead of 8.5%, which is what the EPFO did. Later, it transpired that the surplus didn’t actually exist and eventually there was a shortfall of over Rs 500 crore. This shortfall was then filled up by taking out money from this year’s returns. That means that actually, last year’s returns were fiction and part of this year’s money has already been paid last year to maintain that fiction.

This is an amazing way for a financial institution to function. Knowing how much money it has and how much it’s earning is a core function of any such body. If this were a bank or a mutual fund or an insurance company then the concerned regulator would have booted out the board and the trustees and taken control long ago. If surpluses and deficits can appear and disappear in this manner, then someone needs to do something before a hole too large to fill appears suddenly.

 

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