FSLRC asked to review PF and small savings norms

November 4, 2011

Recently, the Financial Sector Legislative Reforms Commission (FSLRC) has been asked by the government to review of the rules governing Employees Provident Fund Organization (EPFO), government securities and small savings schemes such as public provident fund (PPF) and National Savings Certificate (NSC).

The commission, headed by Justice B N Srikrishna, has two years to submit its recommendations to the government.
Please note that at present, government is reviewing the operations of the small savings scheme, following recommendations by a committee headed by former RBI deputy governor Shyamala Gopinath.

The finance ministry has been seeking a review of the functioning of EPFO for quite some time, which has only recently started modernizing. Besides small savings norms, the Financial Sector Legislative Reforms Commission will examine all laws related to the financial sector, including those for banks, insurance and stock markets.

The major issues with EPFO are as follows:

We have read previously that EPFO does not invest in equities. EPFO has been under pressure to invest in equities to earn higher returns for subscribers.
But it has stonewalled every proposal. Reason behind this is that unlike traditional funds, the EPFO has to declare annual returns, which is added to the accumulated corpus of the subscriber.
Any drop in returns would invite criticism and that is why EPFO has chosen to play safe and be with the debts which give steady returns of 8.5% since 2005-06 and 9.5% in 2010-11. EPFO says the decision to invest in equities would have been easier if there was no obligation to earn a minimum return.
In fact, this is the reason why the labour ministry has asked the finance ministry for a guarantee on capital and some minimum returns if it were to invest in equities.
Large number of subscribers of the EPFO are from the low-income group and the accumulated corpus though very small, yet is a substantial portion of their savings for retirement. EPFO does not consider it fair to risk this savings in equities.
Over the years there have been suggestions that EPFO, which also has an element of pension, be linked to the National Pension Scheme, which will help shift to an improved investment scheme and also deal with unfunded liability of over Rs 20,000 crore.

Background: FSLRC

The fast growing financial sector has to do away with the ambiguity and complexity of the age old legislations, as the amendments and changes had been made years ago. There was a turf of war between the different market regulators. There was a public tiff between SEBI and IRDA over regulations of the ULIP (Unit Linked Insurance Products). Accordingly, Financial Sector Legislative Reforms Commission was announced by the Union Finance Minister Pranab Mukherjee in the Budget Speech 2010. The idea was to set up a Financial Sector Reforms Commission to re-write and clean up the financial sector laws.

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