Source: BS
Context:
The Reserve Bank of India (RBI) has advised the Central Government to introduce reforms in the Employees’ Provident Fund Organisation (EPFO) to strengthen its investment management, accounting systems, and governance structure. The recommendations come as the EPFO continues to declare annual interest rates significantly higher than prevailing government bond yields, creating long-term sustainability risks.
Background:
- The advisory was issued following a request from the Ministry of Labour and Employment, which sought the RBI’s technical expertise to assess EPFO’s investment practices, risk management, and accounting mechanisms.
- EPFO manages over ₹25 trillion in retirement savings for nearly 300 million formal-sector workers, making it India’s largest retirement fund.
RBI’s Recommendations:
- Differentiated Investment Strategy:
- Introduce portfolio diversification beyond government securities, based on risk appetite and member demographics.
- Adopt market-linked investment frameworks that align with modern pension fund practices.
- Market-Linked Accounting System:
- Shift from a book-value-based system to market-value accounting to reflect the true financial position of the fund.
- Enhanced Risk and Governance Framework:
- Strengthen internal controls, actuarial assessments, and treasury management capabilities.
- Establish an independent regulatory mechanism to mitigate conflicts of interest, as EPFO currently both manages and regulates its own funds.
- Capacity Building:
- Expand the expertise of the Central Board of Trustees (CBT) and the investment committee in portfolio management, accounting, and actuarial science.
- EPFO’s Current Investment Pattern:
- 45–65% in Government Securities
- 20–45% in Debt Instruments
- 5–15% in Equities (via index funds)
- 0–5% in Short-Term Debt Instruments
- Yield Comparison (FY19–FY25):
- EPFO interest rate: 8.1%–8.5% range
- Average 10-year G-Sec yield: around 6.5%–7%
- Nifty 50 returns: Highly volatile (ranging from -26% in FY20 to +70.9% in FY21)
