Equity markets offer hugely better returns but since the risks are also real, a 'life-cycle' investment strategy offers a happy solution.

Gautam Bhardwaj, Director, Invest India Economic Foundation

If you invested Rs 100 in the stock market 35 years ago, it would be Rs 13,000 today. The same, at the EPFO's 8.5 per cent, would be worth Rs 1,155!

Around 85 per cent of the workforce covered by Employees Provident Fund Organisation (EPFO) have average account balances of less than Rs 20,000. They collectively own roughly 15 per cent of the EPF corpus. On an average, an EPFO member faces nearly two decades of retirement with a provident fund balance of less than Rs. 50,000.

As nearly 16 per cent of lifetime wages flow into EPF accounts, this clearly reflects the modest individual savings capacity of a majority of EPFO's membership. It also demonstrates the impact of EPFO's liberal outlook (regarding premature withdrawals) as also its overly conservative policies (on asset allocation).

Reports suggest the EPFO has decided to close the tap on premature withdrawals and retirement savings will now be accessible only at retirement - as indeed they should.

But this will have only a limited impact on the retirement outcomes of a majority of EPFO's membership which can at best afford only modest PF contributions. The unions on the Central Board of Trustees should appreciate that their constituents will live for nearly 20 years on average after retirement.

Their only hope of escaping poverty in their twilight years is to achieve the highest possible returns on their PF savings. Much higher returns can however only be achieved by investing PF savings in equity markets - the government has suggested a modest 5 per cent which the CBT unions are opposing.

Evidence from global and domestic markets demonstrates that equities have consistently outperformed other asset classes over pension horizons - in India, over the last 35 years, Rs 100 invested in the stock market index has grown to over Rs 13,000 today while the same Rs 100, invested at even the EPFO's current 8.5 per cent return would be worth just Rs 1,155!

As the retirement outcomes of low income workers are at stake however, it is essential to carefully consider the real risks associated with even a diversified equity portfolio. It is possible, workers nearing retirement could conceivably lose a substantial part of their savings if the underlying index tanks just before they retire.

In this context, it may be prudent to move the savings of workers nearing retirement from equities to a less volatile bond portfolio. In this "lifecycle investment strategy", a fund manager automatically rebalances retirement savings as workers approach retirement.

The trustees of mandatory pension systems opposing this approach, should acknowledge their full responsibility to produce adequate retirement benefits and lowering longevity risks. While guaranteed modest returns will not significantly lower the retirement outcomes of the 15 per cent high-income workers who own 85 per cent of the EPF assets, they more-or-less assure a life of poverty for the remaining 85 per cent with more modest incomes.

M K Pandhe, President, Centre for Indian Trade Unions

Workers could lose everything if bureau-crats are allowed to indulge in speculative activities with the huge Rs 1,28,000 crore EPFO fund.

The government's proposal to invest five per cent of the funds with the Employees Provident Funds Organisation in the share market shows that the UPA regime wants to boost the share market using workers' hard earned money. In fact, five per cent is only the beginning. The design of the government is to invest all the EPFO money in the equity market.

We are opposing this proposal because Employees Provident Fund is a social security scheme and it should not be a matter of speculative activities. In several countries in Europe, workers have lost heavily after their money was deployed in stock market.

In Argentina also, when pension was invested in the share market, workers had to suffer heavy losses. In India, Deputy Director General of Shipping decided to deposit Rs 100 crore of seafarers' PF in share market. The entire money was lost and till today there is no trace of where the money went. UTI had a similar problem, and there have always been allegations that political persons dictate fund investments.

The total funds with the EPFO at present is Rs 1,28,000 crore. Five per cent of this is over Rs 6,000 crore. Workers are likely to lose everything if bureaucrats are allowed to indulge in speculative activities with huge funds. Workers will not allow it. All trade unions are opposed to it. We only expect that the Union Labour Minister sends back the proposal to the Finance Ministry asking the latter to review it.

Earlier the government was treating PF money as Special Deposits and giving 12 per cent interest on it. Now the government has reviewed it. Today, you give the money to a bank for three years and many banks will give you 8 per cent interest.

But this money (of employees) will be there for 40 years. How come the government gives the same rate of interest? Using workers' money as a cheap source of funding! When the government borrows money from banks for deficit financing, it pays a higher rate of interest.

We propose that PSUs, which borrow money from banks at 10 to 12 per cent interest rate, should borrow money from the EPFO at the same rate. State governments take overdrafts from banks. Why can't they take it from the EPFO at the same rate of interest?

If the Board of Trustees is given the powers to decide a proper investment policy, it can find ways and means to get more interest. It can invest in PSUs where the interest on debentures is 9-10 per cent.

The UPA is carrying on with the NDA's decisions on reducing interest rates! Another problem is that the Board of Trustees of the EPFO is undemocratic - while the money is all that of the workers, there are only 10 workers' representatives in the 43-member body, with officials making up the rest. Without contributing anything, the government controls the funds.