The Employees’ Provident Fund Organisation (EPFO) is one of the major pillars of India’s social security framework for the formal sector workers. It manages retirement savings for 1.5 crore subscribers and provides pensions to more than 75 lakh pensioners, and has a corpus of Rs 21.3 lakh crore.
It is not only a provident fund but also a Defined Contribution-Defined Benefit (DC-DB) pension scheme and an Employees Deposit Linked Insurance Scheme (EDLI) which is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The act is applicable all over India to all establishments which have 20 or more employees. It mandates a uniform contribution of 10% or 12% from both employees and employers, with the latter’s contribution capped at 10% or 12% of the wage ceiling fixed at Rs 15,000 for employers. The employer can also match the employee’s contribution at their own discretion. A part of that (8.33%) of the contribution of the employer is transferred to the Employees’ Pension Scheme (EPS) and the rest goes to the employees’ provident fund (EPF). Additionally, the employer pays 0.5% (maximum Rs 75) towards EDLI and 0.5% towards administrative costs.
However, EPFO confronts significant challenges centered around certain issues which ought to be addressed. The maximum monthly employers’ contribution mandated by the act is Rs 1500/- or Rs 1800/- only. Therefore, the act should be modified and the employer should also be liable to pay a compulsory contribution of 10% or 12%. This initiative shall not only promote retirement savings of the employees but shall also increase aggregate savings of the nation.
Further, certain accounts that receive no contribution for three years are declared inoperative and they do not yield any interest thereafter. In a retirement fund, these rules are detrimental to the workers’ interest since they cannot contribute unless they are hired into a firm which has enrolled itself with EPFO. Further, the interest rates in EPFO are higher than that of fixed deposits in banks or public provident funds thus making it a safer haven to keep one’s money for long term
There is a persistent decline in interest rates despite the allocation of substantial investments totalling Rs 2.1 lakh crore (10%) into Exchange Traded Funds (ETFs) in 2022-23. They have declined from 12% in 2000-01 to 8.25% in 2023-24. On the other hand, the National Pension System for Civil Servants (NPS) provides an average return of 9% to 10% (over 15 years) which is higher than that of EPFO.
EPFO’s compound of interest annually is in sharp contrast to global accounting standards. Annual compounding refers to interest being added to the principal sum only once per annum, thus affecting the growth potential of members’ savings in an adverse manner. On the contrary, frequent compounding methods facilitate accrual of interest on a frequent basis thus boosting the growth of the retirement savings of the employee exponentially.
In 2022, only 38% of households were found to be digitally literate. Also, 32% of the adult population were found to be financially literate. These lower rates of financial and digital literacy rates imply that many of the employees encounter challenges in accessing digital platforms like EPFO for managing their retirement savings. Lack of digital and financial literacy also impacts financial planning and retirement savings. Therefore, increasing awareness in these areas would enable members to make informed financial decisions which will secure their post-retirement incomes.
The majority of workers are myopic about their retirement savings, and EPFO plays a crucial role in enhancing their savings through mandatory contributions. Further, in accordance with the World Bank’s recommended framework, it is based on mandatory defined contribution plans for the formal sector workers and acts as both the second pillar and third pillar of old age income security.
It is recognised as one of the leading social security organisations based on its fund management, number of transactions, and subscribers. Thus, reforms involving matching contributions by employers without a wage ceiling, fixed and high returns with frequent compounding and enhancing digital and financial literacy shall lead to the growth of retirement savings promoting social security of formal sector workers in India.
Ayanendu Sanyal is a PhD in Economics and an Expert-Honorary, EGROW Foundation. Views are expressed in the article are personal and do not reflect the views of any institution. The author is thankful to Dr Divya Pradeep for her comments on the article.
