The Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO) has recommended a small reduction in the interest rate to 8.55% for the current year (2017-18) for EPFO holders. Last year, the interest paid was 8.65% to all EPFO holders.
This recommendation of 8.55% interest by the CBT will now be sent to the Ministry of Finance for approval and once approved by the Finance Minister, the interest will be credited to your EPFO account.
One missing piece in the gains passed to investors by EPFO has been the appreciation in the equity markets from its investments using ETFs (Exchange Traded Funds). Till 2014-15, EPFO used to invest only in fixed-income instruments. It started investing in ETFs in August 2015. Till now, the annual interest credited by EPFO every year is only on basis of interest from only the fixed income investments. The gains from the equity investments have still not been passed to EPFO investors as the methodology of how it should be done was under discussion. This year, as per reports, a small part of some of the ETFs have been sold to accrue the gains and this has been included in the interest rate. The debt component this year has been able a generate a return of only 8% and hence the EPFO has liquidated some of the ETFs (around Rs. 3700 cr) to accrue more gains so that the total interest rate for you could be 8.55%. However, this step in the current year seems like a stop-gap measure and a large part of the equity gains are still embedded in the investments and once the final methodology is implemented, you as an EPFO investor can benefit more.
The proposed methodology for passing on the gains from equity investments is as below and this will be implemented soon as this process has been approved by the CBT. Firstly, a cut-off date will be decided and only if you are an active EFPO member as on that date will the past equity gains will be accrued you. If you have withdrawn your EPFO balance before the cut-off date, you will not be eligible for this part. This is an important point for you to remember. As on the cut-off date, based on a formula approved, your EPFO account will be credited with units which you can withdraw, as and when you close your EPFO account.
The methodology which is based on the report of a committee led by IIM Bangalore and then operationalised with due inputs from CAG and another operational committee comprising of members from the fund management industry, CRISIL and EFPO representation has two parts viz. (a) NAV computation and (b) Units allotment to your EPFO account.
The important steps in this process are enumerated below:
1. The EPFO will announce the NAV of the composite ETFs held on a monthly basis, usually on the last date of the month.
2. The starting NAV will be Re. 1/- and the NAV will calculated upto 4 decimal places depending on the gains till date from the date of investment.
3. For the past investments i.e. from Aug 2015 till the cut-off date, units will only be credited to the EPFO accounts of holders who are active as on the cut-off date and have made contribution in the relevant prior period. If you have withdrawn or closed your account prior to the cut-off date, no units will be credited to your account.
4. On an ongoing basis, once implemented, based on the NAV, every month, your EPFO account will be credited with units on the last day of every month.
5. Your EPFO account statement now will have two parts – Debt component and the Equity component. The equity component will give you the details of the units to your credit, the NAV at which they were allotted and the current value of the same.
6. The units allotted to you will depend on your past cumulative contributions till the cut-off date proportionate to the overall ETF investments by EPFO and then on a monthly basis based on your contribution.
7. When you close your EPFO account in a particular, the units will be redeemed based on the NAV of the previous month in case the withdrawal needs are immediate and at the end of the month, if the withdrawal of same is needed after the computation of the NAV of that month.
The committee has suggested that since the contribution in the EPFO are more than the withdrawals, hence in normal cases there will be no need to sell the underlying ETFs and the withdrawals can be made from the incoming contributions. However appropriate accounting adjustments will be made to reflect the impact on the MTM (marked to market) reserves to correctly reflect the underlying value.
The above changes will require substantial changes in the accounting software of the EFPO for maintaining the unit balance of each subscriber and hence this will be implemented after making the appropriate changes and then the cut-off and implementation date will be announced by the EFPO.
As per EPFO, a total investment of over Rs. 32,298 crore was made till 31st Oct 2017. This would have crossed Rs. 40,000 cr till now with an underlying 20% gains or in that range at the current market levels. You will need to ensure that you continue to be a part of the EPFO if you want to partake of the equity gains that the EFPO has currently invested in.
(Manoj Nagpal (@NagpalManoj) is Consulting Editor with Moneycontrol)