24 Dec, 2010, 11.40AM IST, Amiti Sen,ET Bureau
NEW DELHI: The finance ministry has shot off a fresh missive to the labour ministry asking it to invest a part of the Rs 5 lakh crore corpus of the employees’ provident fund savings in stock markets.
In a recent letter, North Block has categorically ruled out providing any guarantee on returns on such investments, but said safeguards could be built to minimise risks and maximise gains for subscribers.
“The finance ministry’s refusal to guarantee returns continues to worry us, but we are willing to look at the suggestions made,” a labour ministry official told ET. The official did not reveal the details of the investment pattern suggested by North Block.
The finance ministry had earlier proposed that the EPF organisation could set aside 15% of funds for investments in the stock market and need not seek a nod from the Central Board of Trustees, or CBT, the policymaking body of the employees’ provident fund organisation, or EPFO.
The labour ministry is, however, clear that it cannot decide on the issue unilaterally, sidestepping the Central Board of Trustees. The EPFO, which manages the provident fund savings of approximately 4.7 crore organised sector workers, has steadfastly declined to invest provident fund accumulations in equities.
Following a decision by the trustees, Labour Secretary PC Chaturvedi had written to the finance ministry that it would be willing to do so, if the finance ministry guaranteed safety of investments and assured some minimum return on such investments. “We will place the suggestions made by the finance ministry before the CBT, which will take a final call on the matter,” the official said.
The EPFO has been giving 8.5% return on funds annually since 2005-06, which rose to 9.5% this year after it disbursed some unaccounted money in the fund. The fund has a corpus of Rs 3 lakh crore, and private trustees, which follow the fund’s investment pattern, have another Rs 2 lakh crore.
The finance ministry has argued investing a portion of the Rs 5 lakh crore EPF corpus in stocks would help the fund generate higher returns than the government-backed securities that the fund currently invests in. North Block had pointed out that the new pension scheme, or NPS, which invested part of the money in stock markets, earned a much higher 14.5% return last year.
The EPFO has reasoned that it cannot invest in equities because it is required to generate and credit income to account balances every year.
The labour ministry also argued that both schemes cannot be compared as NPS keeps money till retirement while employees are allowed to withdraw money from provident fund for various purposes like education, marriage, etc.
“These are real payouts we have to make. Roughly about Rs 20,000 crore is paid out every year to almost 60-80 lakh people,” the official said.
Dhirendra Kumar of Value Research does not buy the logic. “It is more risky not to invest in equities because returns on government-backed securities could go down to very low levels and it would be more difficult for the EPFO to explain a lower, say a 5.5%, return,” he said.
Source:- http://economictimes.indiatimes.com/news/economy/finance/finance-ministry-again-asks-labour-ministry-to-invest-part-of-epf-in-markets/articleshow/7153801.cms
