EPFO set to announce 9% or higher interest for FY12

NEW DELHI: Employees’ provident fund accounts are likely to earn at
least 9% return in 2011-12 as a combination of lower-than expected outflow from
inoperative accounts and a high interest regime is prompting the Employees
Provident Fund Organisation (EPFO), the body that manages EPF accounts in the
country, to consider announcing a higherthan-normal rate of return for the
second year in a row.

Amid opposition from the Finance Ministry, the EPFO had announced a
9.5% rate of interest for 2010-2011, which was more than 8.5% it had offered in
the previous five years. This was supposed to be a one-off offer as the EPFO
had discovered an additional Rs 1,700 crore lying in its suspense account.
A government official said an interest rate of 9% or higher was a distinct
possibility for the next year as well. “The continuous rise in interest
rates and the low levels of claims made from inoperative account has resulted
in a situation where the government could comfortably declare a 9% or higher
return on PF deposits,” said the official.
The EPFO, which manages over 4.7 crore EPF accounts, fixes the annual
interest rate on provident fund savings before a fiscal begins so that the dues
of those who retire during the course of the year can be settled.
The Central Board of Trustees (CBT), the highest decision-making body
of the EPFO, is likely to meet soon to decide the interest rate for the next
fiscal and also to take a call on whether interest on in-operative accounts
should be distributed amongst operational account holders.
“The issue will be placed before the trustees. The chances of the
CBT taking a favourable decision is high as the ultimate objective of the fund
is to maximise yields for subscribers,” the official said. The CBT
consists of representatives of trade unions and employers’ bodies and is headed
by the labour minister. The EPFO manages more than Rs 3 lakh crore of PF
deposits of employees in the organised sector, covering all establishments
employing more than 20 workers.
Employers are obligated to deduct 12% of the basic salary of their
employees every month and deposit this to the PF account of each employee. They
are also required to make a matching contribution to each employee’s account.
The bigger organisations can manage these funds in-house under strict watch of
the EPFO and have to match the returns declared by it.
In a clean-up exercise last year, the EPFO had said it would stop
paying interest on inoperative accounts – ones that have remained idle for
three continuous years – to encourage subscribers to withdraw funds or merge
them with operative accounts. However, despite a heavily advertised campaign,
not many subscribers have come forward to settle these idle accounts that have
a balance of nearly Rs 15,000 crore.
The EPFO does not expect more than Rs 5,000 crore outflow from these
accounts. This would mean that an additional interest earning of about Rs 900
crore from the remaining Rs 10,000 crore would be free to be distributed among
subscribers with operational accounts. “It would allow EPFO to give an
additional 0.5%interest,” the official said.
In addition, the near 1% rise in interest rates on government
securities will also fetch higher returns on the incremental inflows and amount
that is reinvested from maturing investments. “Although most of the
investments made by the EPFO are long term in nature, the fresh deposits and
the matured investments that are invested will earn more returns resulting in
an estimated 8.75% overall yield,” the official said.

Source: ET