Avoidable controversy

Trade unions are up in arms against the finance ministry’s notification transferring unclaimed employees’ provident fund (EPF) balances to a Senior Citizen’s Welfare Fund. It is difficult not to sympathise with them. There is no doubt that India’s 10.5 crore senior citizens are in dire need of social security. But the logic for funding this by appropriating provident fund balances, which mainly represent the retirement savings of low-income workers, is debatable.

The Centre’s rules do stipulate some conditions before the unclaimed balances are swept out. Only inoperative accounts unclaimed for seven years will be considered. The Employees’ Provident Fund Organisation (EPFO) is also required to “try to contact” the accountholder through written notice, email or phone, on “at least two occasions” within a 60-day period. Still, the workers’ argument that this move smacks of robbing Peter to pay Paul is valid. For starters, the ‘inoperative’ EPF accounts do not really belong to workers who are untraceable or missing. Instead, they mostly belong to those who have simply changed jobs and failed to transfer their accounts due to procedural hassles. This explains why as many as 9.23 crore of the 15.84 crore accounts, with balances of ₹44,000 crore, are classified as ‘inoperative’. Two, given that the EPF is a long-term retirement vehicle, a seven-year time bar on claims from it — the same as for unclaimed dividends or deposits — is too short. The EPF Act of 1952 in fact protects these accounts even from attachment by court decree, which is clearly intended to shield them from any external interference. With the bulk of the EPF money already channelled into government and public sector bonds, the argument that the unclaimed balances are ‘unproductive’ holds no water either. Any move by the Centre to appropriate EPF balances must ideally take the fund’s board of trustees into confidence and entail a public consultation process.

While the workers’ worries on unclaimed balances are valid, their opposition to raising the equity exposure of the Fund from 5 to 10 per cent stands on much weaker ground. Having won approval for a 5 per cent equity exposure last August, the EPFO has deployed just ₹7,468 crore, or less than 1 per cent of its corpus, in stocks as of June 30, earning a 7.4 per cent return. At this level the equity exposure is too small to make a material difference to the Fund’s overall returns. While high stock market valuations make this a less-than-ideal time to raise equity allocations sharply, the EPFO can probably persuade the unions on the merits of a phased increase over the next one year. Overall, the Centre should keep in mind that one too many attempts to tinker with the EPF rules create avoidable confusion among employees using it as their default retirement vehicle. It also undermines their confidence to invest in it.