Interest rate on employees' provident fund deposits on Saturday, March 12, was cut to a four-decade low of 8.1% for the 2021-22 fiscal from 8.5% in the previous year. This is the lowest interest rate since 1977-78 on deposits that employees make towards their retirement fund. Interest rate on employees provident fund that year stood at 8%.
The 8.1% interest rate was recommended by the Central Board of Trustees (CBT) after its meeting in Guwahati under the chairmanship of Union Labour and Employment Minister Bhupendra Yadav, a labour ministry statement said. "The Central Board recommended 8.10% annual rate of interest to be credited on EPF accumulations in members' accounts for the financial year 2021-22 (ending on March 31, 2022)," it said.
The recommendation will now go to the Union Finance Ministry and will be notified once it is approved by it. "The interest rate would be officially notified in the government gazette following which EPFO would credit the rate of interest into its subscribers' accounts," the statement said.
The EPFO paid 8.5% interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65% in 2018-19 and 8.55% in 2017-18. In 2016-17, the EPF interest rate was at 8.65%. The EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1%. Employee representatives sought higher interest rates but the CBT settled for 8.1%.
Sources said that interest rates are fixed based on the earnings of the retirement fund body on the deposits it has. While the corpus has gone up by 13%, interest income is up only 8%.
A CBT member said the interest rate setting reflects the state of the Indian economy and the difficulty the EPFO faces in generating returns from a sizeable corpus. The EPFO invests 85% of its annual accruals in debt instruments, including government securities and bonds, and 15% in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.
While the labour ministry statement did not give reasons for cutting interest rate, it said, "the Employees' Provident Fund Organisation (EPFO) despite following a conservative approach towards investment, has consistently generated high returns over the last many years which has enabled it to distribute higher interest to its subscribers, through various economic cycles with minimal credit risk."
"For FY 2022, EPFO decided to liquidate some of its investment in equities and the interest rate recommended is a result of combined income from interest received from debt investment as well as income realized from equity investment. This enabled EPFO to provide a higher return to its subscribers and still allowed EPFO with a surplus to act as a cushion for providing a higher return in the future also. There is no over-drawl on the EPFO corpus due to this income distribution," it said.
The EPFO has liquidated Rs 12,785 crore worth equity investments in exchange-traded funds (ETFs) and will use capital gains of around Rs 5,529 crore from it for the FY22 EPF interest payout. The annualized rate of return on this investment was 13.91% this is the highest in the last three years.
The board also ratified the decision to redeem Non-Convertible Debentures of Air India in EPFO's portfolio. This redemption had helped EPFO realise Rs 8,944.32 crore against the face value of Rs 7,772.50 crore, the statement said.
During the meeting, the CBT also approved the revised estimates for 2020-21 and budget estimates for 2022-23 for schemes administered by EPFO.
The board ratified the extension of tenure of External Concurrent Auditor, Custodian, and the tenure of SBI MF & UTI MF as ETF manufacturers till March 31, 2022 or till appointments are made whichever is earlier.
The statement said that among other decisions, the board has decided to increase the welfare funds allocated for sports and cultural activities. Five percent sports quota vacancies will be filled up with suitable candidates and an objective criteria will be laid down for filling these vacancies, it added.
The board approved the recommendations of the ad-hoc committee on coverage and related litigation to ensure universal coverage to all under the social security schemes of EPFO upto the wage ceiling. It also agreed to extend social security coverage to gig and platform workers.
The board approved the recommendations of the ad-hoc committee on pension reforms to constitute the task force of experts in the field of pension and social security to suggest possible measures to enhance the benefits from the EPS-95.
This task force will include members from PFRDA, LIC, VVGNLI, two independent actuaries, chief investment officers of some reputed investment firms/mutual fund houses, financial or any other expert. On this occasion the EPFO also launched PE portal 2.0.