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View: Why EPFO investment rules should be overhauled

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Provident fund subscribers may reportedly earn lower returns on their retirement corpus this fiscal. A suboptimal payout again only shows how poorly the Employees’ Provident Fund Organisation (EPFO) manages worker’s retirement funds, due in a large measure, to its reluctance to move with the times.

Instead of parking funds in the safe harbour of government bonds, it should venture out into the open, where risks and rewards are both higher, diversifying its portfolio across asset classes: private equity, mutual funds and Real Estate Investment Trusts (Reits). Pension funds from across the globe invest in Indian stocks. There is no reason why the EPFO should cap its equity portfolio at 15%.

Rules allow the EPFO to invest only a tiny proportion of up to 5% in Reits. It makes sense to raise this ceiling, as India urbanises, both to fund new real estate and reap higher returns. The Norwegian sovereign wealth fund, the largest in the world by assets under management, for example, is reported to be boosting its stakes in real estate companies for higher returns.

India needs many new towns to disperse new migrants from villages to towns. Climate change now adds to the challenge of urbanisation that needs to be better planned. The EPFO should use the pool of workers’ savings to help build new cities, and enable them reap higher returns on investment in efficient infrastructure.

The government should also implement its decision to allow workers to shift the mandatory saving from their wages and salaries to the national pension scheme that generates superior returns, if they chose to do so. Competition from a rival fund will incentivise the EPFO to do a better job in managing workers’ retirement savings. The larger point is for the government to overhaul investment rules for the EPFO.

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