Finance, Labour Ministries Lock Horns over NPS and EPF

Whether or not a part of an estimated Rs 5 lakh crore of provident fund should be invested in stock markets has become a bone of contention between the ministries of Labour and Finance.
While the Finance Ministry wants Labour Ministry to work on investing about 15 per cent of the Employees’ Provident Fund Organisation (EPFO) money in stock markets for better returns without taking the issue to the PF trustees, the latter has decided to do otherwise.
Whereas the EPFO commands a corpus of Rs 3 lakh crore, other provident funds, which follow the Fund’s investment pattern, have another Rs 2 lakh crore.
In a letter to Labour Secretary P C Chaturvedi, Finance Secretary Ashok Chawla referred to the changes by EPF schemes earlier without any discussion in the Central Board of Trustees (CBT) and said, “it (Labour Ministry) can take a similar view on the issue of investment pattern.”
However, the Labour Ministry has forwarded the letter to EPFO to take a view on the matter.
CBT is an apex decision making body for EPFO and is likely to meet on September 10 to take up the issue.
The Finance Ministry wants the Labour Ministry to follow investment pattern notified by it, which provides for up to 15 per cent of the corpus in stock markets.
However, CBT’s advisory body Finance and Investment Committee (FIC) on Wednesday stuck to its stand against investment of EPFO money into stock markets–either in shares or indices.
In his letter, Chawla sought to remind the Labour Ministry that it used to adopt the investment pattern notified by the Ministry of Finance for many years.
“However, the Ministry of Labour has not adopted the investment pattern notified by the Ministry of Finance in January, 2005 and November, 2008 and investment pattern of the Labour Ministry continues to be the same which was earlier notified in July, 2003,” the letter said.
Favouring the stand of no investment in stock markets, EPFO said at the FIC meeting yesterday that while investment in stock markets is subject to market volatility, “there is no risk of capital erosion in the case of EPF investments.”
It also countered Finance Ministry’s claim that the New Pension System (NPS), which has an option to invest in stock markets, is giving better returns than EPF.
The Finance Secretary said in his letter that while NPS for central government employees could generate a weighted average investment return of 14.82 per cent for the central government employees in 2008-09, EPF is giving only 8.5 per cent returns to its subscribers for many years.
The EPFO has been giving 8.5 per cent returns to its subscribers since 2005-06.

Countering Chawla’s views, EPFO said the income earned on EPF investments are actually realised, while the returns declared in NPS are notional and subject to market conditions.

This is so because, said EPFO, the returns generated under NPS are based on net asset value while the returns declared by EPFO are based on actual coupon received on its investments
-businessworld