Most retirement savings from India’s organized, non-government workforce go into a provident fund managed by EPFO, to which employees and employers contribute. EPFO manages INR 2.43 trillion (USD 53 billion), including INR 1.56 trillion from its provident fund. EPFO is run by a board of trustees that sets an annual rate of return.
Recent reforms have increased the rate of return
Before the recent reforms, EPFO funds were managed by the SBI, which provided a return of around 5.25% per year. But trade unions - which have representatives on EPFO’s board - and their supporters in India’s leftist political parties maintained constant pressure to raise subscribers’ returns further. Although the government held the 2007/08 rate down to 8.5%, EPFO must deplete its reserves to cover the shortfall between this and what it earns.
Further reforms in sight
Since EPFO is being forced to pay out higher returns than it is earning, it is not surprising that the government is keen to reform the entire retirement savings market. As well as improving returns, it wants to increase coverage, since only 12% of India’s working population is covered by retirement benefit schemes. It also aims to channel these stable, long-term funds into the country’s debt, equity and infrastructure-finance markets. The idea is to increase market depth and provide a counterweight to investments by mutual funds and foreign investors, who may have shorter-term perspectives.
For more information, please visit www.kotaklifeinsurance.com