Your provident fund savings all set to fetch higher returns from 2013-14-

You can expect your provident fund savings to earn better returns from 2013-14, though small savings instruments like national savings certificates will deliver lower returns from April 1. 

The Employees' Provident Fund Organisation (EPFO) will adopt a new investment pattern from the coming financial year, junking its archaic investment norms that have remained unchanged since 2003 and have been blamed for the falling returns on EPF savings in the last two years.

In 2011-12, over Rs 6 crore EPF members were paid 8.25% on their retirement savings. For 2012-13, a return of 8.5% has been declared though the finance ministry is yet to ratify the payout.

By contrast, PPF savings earned 8.8% this year and will earn 8.7% in 2013-14. The labour ministry has decided to modify EPFO's investment norms to boost returns on its Rs 5,00,000 crore corpus and stave off persistent criticism from stakeholders and the finance ministry over EPF returns being lower than high inflation rates and the comparable returns of 10%-14% offered by the New Pension Scheme run by the Pension Fund Regulatory and Development Authority.

The EPFO was hurtling into an investment crisis and its income was expected to fall to 8% by 2017-18, if it had maintained status quo. Though its corpus has been increasing, EPFO's investment avenues haven't grown, even as it faces increased competition from foreign institutional investors and domestic financial institutions in the bond market.

Under the new norms, EPFO can invest its corpus in bonds issued by eight new blue chip private sector firms such as Reliance Industriesand Larsen and Toubro. Eight more firms, which include Tata Consultancy Services, Infosys Technologies, Wipro and Ambuja Cements, could also qualify for fresh bond investments.

This will significantly expand the universe of private firms that EPFO can invest in, which currently only includes seven firms — HDFCBSE Bank, LIC Housing Finance, ICICI Bank, Infrastructure Leasing and Finance Services Ltd, Axis Bank, HDFC and IDFC.

To improve its returns from PSUs bonds, the EPFO has changed the tenure limits for such securities so that it can lock into better returns for a longer period. The maximum tenure for AAA-rated PSUs has been raised from 15 years to 25 Years, and from 8 years to 15 Years for AA-rated PSUs. AAA ratings denote the highest level of safety for bond investments.

Rating agency Crisil reckons that changes in norms for private sector firms' bonds would boost EPF earnings by over Rs 3,000 crore in next 10 years. Similarly, allowing longer-term investments in public sector bonds would boost its income by over Rs 7,700 crore over the next decade.

Income from plain vanilla government bonds would also go up, as the PF office will now be able to deploy upto 55% of its fresh inflows into state government bonds that deliver higher returns than central government securities, where 70% of its annual corpus is currently parked. Nearly 90% of EPFO's private bond investments were concentrated in banks, as on December 2012.

Even among public sector bonds, banks accounted for 53% of EPFO investments while other firms accounted for just 35%. With new bond issuances from public sector firms being limited, it has been forced to park money in banks' term deposits.

The RBI's implementation of Basel III capital regulations also creates the problem that new bond issues from banks will have an equity convertibility clause. The EPFO has steadfastly opposed equity investments, though finance ministry has opened the stock market window for PFs since 2005.

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If you thought every rupee was valued in these days of rising prices, think again. A huge sum of Rs 22,636 crore is lying in inoperative accounts with the Employee Provident Fund Organization (EFPO). 

These funds are linked to accounts that are lying dormant for more than 36 months and are earning no interest for their account holders. Largely, this is because employees holding these accounts have moved on to new jobs and have not transferred their EPF accounts to that of the new employment. 

Earlier, even if an account was not active, interest at the applicable rate accrued on the funds lying in such accounts. (The interest rate fluctuates from year to year; for the current financial year, it will be 8.5%.) However, owing to an amendment, which came into effect from April 1, 2011, no interest is credited to the account of an EPF member from the date on which it becomes an inoperative account. 

As an inoperative account is defined as one in which no contribution has been made for at least 36 months, from the 37th month onwards no interest is credited by the EPFO against funds in such accounts. Maharashtra with a sum of Rs 7,427 crore lying in inoperative accounts tops this list, followed by Tamil Nadu and Andhra Pradesh with funds aggregating to Rs 2,433 crore and Rs 1,797 crore.

These details, based on the unaudited accounts of the EPFO for the year ended March 31, 2012, were made available to Parliament during the last winter session. In addition to this figure, several large corporate groups in India have their own provident fund trusts, which are not administered by the EPFO. Many such companies also admit to having inoperative accounts, even as they periodically follow up with their ex-employees or their legal heirs. 

"On changing a job, the employee should file Form 13 with the new employer. On receipt of a complete and correct form by the EPF authorities, the funds ought to be transferred from the PF account maintained by the old employer to that of the new employer within thirty days. However, many employees fail to follow this process and over a period of time the EPF accounts set up while in their previous employment become inoperative," explains Yatin Pathak, a chartered accountant. 

"A large chunk of these inoperative accounts have minuscule deposits of Rs 5,000 or less. Since the employee has already left that particular company, no administrative fee can even be collected from the company concerned. It is the EPFO which has to bear the administrative costs," states an official attached to the ministry of labour. This was perhaps one of the reasons for withdrawing the accrual of interest on inoperative accounts, he adds. 

The mandate given to EPF offices across India is to clear applications for transfer within 30 days. However, HR practitioners admit that employees face delays and hassles in transferring their accounts.

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Tightening the noose around private PF trusts, retirement fund body EPFO has decided to use IT-driven monitoring mechanism to ensure improved compliance of EPF scheme by them. 

"It is proposed to take measures to effect an IT-driven monitoring mechanism for the exempted establishment," an Employees' Provident Fund Organisation's (EPFO) order for the field staff said. 

These private provident fund trust or exempted establishment are formed by firms which manage their employees' EPF accounts and funds. 

The subscribers of these trusts and employers managing those also enjoy income tax benefits at par with the EPFO subscribers and firms maintaining their PF accounts with regional officers of the body. 

According to the order, the annual report for the year 2011-2012, the total number of such exempted establishments or PPFT is 2,750 whereas, as per establishment master (other records) of regional officers, there are 4,417 such trusts. 

EPFO has asked its field staff to ensure whether the exempted trusts or establishments or PPFTs have submitting the prescribed returns. 

The field staff has been asked to find out and ensure that all the eligible employees are enrolled under the Board of Trustees (BOT) of the PPFTs and their PF contributions are paid in time. 

It has also directed them to ensure that BOT invest PF amounts in accordance with that investment pattern and within the stipulated time frame. 

The regional offices have also been directed to ensure that contributions are being paid at the rate of 12 per cent (of basic pay and dearness allowance) over the years. 

Employers as well as employees are required to contribute 12 of the basic pay and dearness allowance towards the provident fund accounts every month. 

It has been asked by the head office to find out and ensure that whether the interest rate (on the PF deposits) at the prescribed rates or above have been declared by the respective BOT over the years. 

Under the scheme, the PPFTs have to maintain the rate of interest on PF deposits announced by the FPFO for a fiscal year. They cannot lower than the prescribed rate. However they can pay more than what EPFO prescribes. 

EPFO headquarter also asked the field staff to provide it a comparative statement of employment strength, enrollments, the quantum of PF contributions paid to the BOT (under EPF) as well EPF office (under Employees Pension Scheme) over the last 3 years in order to find out whether there is any perceptible fall in either enrollment and PF contribution by these PPFT. 

EPFO want the regional offices to complete this exercise in order to have online compilation of exempted status and related information about such trusts.

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The country's chief auditor has uncovered a Rs 1,336-crore negative balance in the books of the Empoyees' Provident Fund Organisation (EPFO), the custodian of Rs 8.15 crore formal sector workers' lifetime savings.

A report, prepared by the Comptroller and Auditor General (CAG) and reviewed by ET, says this discrepancy in the EPFO's books for 2011-12 could grow further. For beneficiaries, this could mean lower returns on provident fund savings for 2012-13 and 2013-14, if the difference remains. The CAG's findings indicate that the PF rate for 2012-13 could have been as much as 9% if its accounts were in order.

On Monday, the EPFO's trustees are expected to consider an interest rate of 8.5% on the provident fund savings for 2012-13. The payout last year was at 8.25%.

The EPFO had updated Rs 16.62 crore pending accounts of PF subscribers in 2011-12, under a special drive to rectify its accounts. This resulted in the PF office paying out Rs 1,336 crore more than the funds available with it, the auditor has highlighted. The interest suspense account (ISA), where income from EPFO's investments is parked, had a balance of Rs 22,461 crore at the beginning of 2011-12, but the EPFO credited Rs 23,797 crore into members' accounts during the year.

"(This) had resulted in negative balance of Rs 1336.12 crore in the ISA. Exhibition of negative balance in the balance sheet resulted in understatement of total liabilities and assets," the auditor said, adding they are unable to form an opinion on the 'correctness' of the amount paid out to members "in the absence of details and break up" of interest credits.

The CAG report has warned that the negative balance will expand as the EPFO had 38.74 lakh accounts "pending for updation" on March 31, 2012. "The updation of these accounts will further increase the negative balance... and consequential decrease in amount of interest to be credited in the next year," the report says. The board's finance committee had refused to discuss the EPF rate proposal at its meeting on February 15, but the CAG's comments on the negative balance and its impact on the interest rate were debated upon.

In its response to CAG's observations, the PF office has admitted that such negative balances resulting from "overdrawal" of funds are "adjusted" while calculating the next year's PF rate.

To buttress the argument, it has pointed to the negative balance of Rs 510 crore in 2010-11 that was "adjusted from estimated interest income" of 2011-12. The EPF rate saw the sharpest cut in a decade in 2011-12, when it was slashed from 9.5% to 8.25%. If the PF office hadn't begun this year with a Rs 1,336 crore negative balance, the feasible EPF rate could have been 0.5% higher, or 9%, as per the income and liability estimates for 2012-13.

"The same approach will be taken while proposing rate of interest for the year 2012-13, to insure there is no net overdrawal," the EPFO has said.

The department has justified the negative balance saying the EPF rate is declared by comparing estimated interest income and liability. "Since this exercise involves assumption of certain figures, the actual result may be different." On the warning that the negative balance could increase in 2012-13 and depress the EPF rate for 2013-14, the EPFO has said that the "principal amount" corresponding to the 38.74 lakh pending accounts is not known. "Therefore, interest thereon to be credited is also not known at present."

The audit findings and the EPFO's response would also be examined by the board.

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The retirement savings accumulated in your employees' provident fund (EPF) account would fetch a return of 8.5% in 2012-13, labour and employment minister Mallikarjun Kharge announced on Monday at a meeting of the board of trustees of the EPF organisation. 

The trustees also agreed to free up the moribund norms followed for EPF investments, though stock market investments continued to get a thumbs-down. 

The decision to pay 8.5% offers minor relief to Rs 8.15 crore formal sector employees, whose EPF savings got only 8.25% in 2011-12. But it also marks the second year in a row that EPF returns are less attractive than small savings instruments like the public provident fund (PPF) and National Savings Certificates. 

EPFO had proposed to pay 8.5% as a 'feasible' return this year based on its income and liability estimates. By contrast, PPF savings have been earning 8.8%, while 5-year and 10-year national savings certificates offer a return of 8.6% and 8.9%, respectively, since April 1, 2012. 

An audit of the EPFO's accounts for the previous year had revealed that the EPF scheme began 2012-13 with a negative balance of Rs 1336 crore because it ended up paying its members more than it had earned in 2011-12. 

If it had started the year on a clean slate, the EPF rate for 2012-13 could have been 9%. The audit has warned that this negative balance could grow further and lower the EPF rate for 2013-14 as well. 

To boost the EPF scheme's income, the board gave a green signal to invest in bonds of private sector firms with a net worth of at least Rs 3,000 crore and a five-year track record of paying 15% or more dividend. EPFO's fund managers have been urging the board's finance committee to route a small portion of its corpus to Dalal Street and liberalise some of its stringent conditions. 

EPFO currently follows an investment pattern notified by the finance ministry in 2003. Though the finance ministry allowed provident funds to invest upto 5% in equities in a fresh pattern applicable since 2005, the PF board had rejected the revised norms in entirety citing its discomfort with equity investments.

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The Nagpur office of Employees Provident Fund Organization (EPFO) has sentenced a contractor of M/s Morarjee Textiles Limited, which has its unit at Butibori, to a month's civil imprisonment for default in depositing PF dues.

EPFO, which is dubbed to be the world's largest social security organization, has the powers to sentence a defaulter to imprisonment. However, this is the last resort.

In this case, KP Gupta did not pay PF dues to the tune of Rs 32 lakh. He was arrested and produced before the assistant commissioner of provident fund. "Keeping in view the huge default, the contractor was sentenced to a month's imprisonment. Recovery proceedings are also being initiated against Morarjee Textiles, which is the principal employer," said a press release issued by EPFO. Gupta provided labour on contractual basis to this company.

The EPFO press release said that more such stringent recovery actions like arrest and attachment of properties are expected in the near future. Even in the past, EPFO has arrested certain defaulters in the city.

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