Private trusts scrambling to match demands from unforeseen rate hike

There are over 3,000 private provident fund trusts,including exempt trusts in the country that handle the retirement savings of their employees independently of the EPFO,although they operate by its guidelines. In total,they manage funds amounting to Rs 2 lakh crore.

Companies including Hewlett Packard,Motorola,American Express,Daimler Chrysler,HDFC Bank,Ranbaxy Laboratories,Bharat Heavy Electricals Ltd,Maruti Suzuki and British Airways run their own PF trusts.

About 60 per cent of these trusts are understood to be facing a shortfall in reserves and are looking for alternate measures that would help fund the interest rate hike.

“A Rs 100 crore fund that earns 8.25 per cent would have been exposed to requiring an injection of Rs 25 lakhs if the EPFO rate was 8.5 per cent. That would now increase by Rs 1 crore with the interest rate having to be guaranteed to employees at 9.5 per cent,” said Kulin Patel,head of employees benefits practice of a global retirement benefit consultancy firm Towers Watson,India.

The Employees’ Provident Fund Organisation (EPFO) was able to finance the one per cent hike in interest rate after it found surplus funds of Rs 1,731 crore accumulated over the last 58 years. It is confident that privately managed PF trusts would also be able to find a similar windfall hidden in their books of accounts.

Officials said private PF trusts had also approached the ministry of labour,which is responsible for the EPFO,to exempt them from paying the additional 1 per cent interest,but were turned down.

“We are sure that the recognised provident funds (PF) would not find any difficulty in paying 9.5 per cent rate of return to their depositors as they follow the same cash accounting system followed by EPFO,” central PF commissioner Samirendra Chatterjee told The Indian Express .

Not surprisingly,fund managers of these trusts are unsure how this additional outgo would be met,even as many are asking analysts to review their books and find a hidden treasure. Companies argue that they don’t have any reserves as whatever additional interest their PF trusts have earned,have been distributed amongst the employees.

“It would be a tough call for them to find the money. For one thing,many of the recently formed trusts would not have such reserves and they may have to pay out of their own pockets,” said Amit Gopal,senior vice president at India Life Capital.

Agreed Patel,who said,“Coupon rates have been steady declining over the last few years and so it will be difficult for trusts to achieve a return of 9.5% this year. Trusts are also restricted in the investment pattern they can invest.”

The ability of PF trusts to seek additional funds by investing in the equity markets is also restricted by the rigid investment norms that govern their investment choices. Although the finance ministry eased rules and permitted retirement funds to invest 5 per cent of their corpus in equities in 2005,and raised it to 15% in 2009,the EPFO abides by the norms laid down in 2003 that prohibit any investments in equity. As a result,the provident funds can only invest in government and corporate debt.

“ With a yield of 7 to 7.5 per cent on most government bonds,100 per cent debt oriented funds find it difficult to generate a return of 8.5 per cent,” an analyst pointed out,adding that giving an 8.5 per cent return would be difficult in the coming year.

The Central Board of Trustees in its board meeting last month once again ruled out any move to invest in equities,further cramping the investment options for private run trusts.

“Already the private sector trusts find it difficult to earn more than eight per cent return given the strict investment guidelines for deployment of PF corpus,” industry body FICCI said in a statement earlier,adding that the government should also consider introducing some flexibility in the investment pattern for of the PF corpus so that companies can benefit by investing in higher yielding avenues,such as the stock market.

This is however a long standing issue that does not seem to be sorted out soon. The Central Board of Trustees in its last meeting indicated once again that it was not in favour of investing in equities unless the government guaranteed the EPF corpus.

For 2010-11,most companies that have their own PF trusts may have no option but to pay the one per cent additional interest from their own pockets. “Simple steps like ensuring that cash and short term deposits are kept to the required amounts only and large idle cash is not sitting around would help. Governance of these funds by trustees will be critical to ensure that the employer is not exposed to a shortfall any more than necessary,” advised Patel.

Some experts also believe that companies could decide to partially restructure the salaries of its employees to ensure that their total outgo on salaries stays on track and does not hit their profits “In case a company has to pay the additional interest from its own pockets,then it could impute it as an invisible cost and marginally reduce the amount to be distributed as bonus or salary hike. Any visible step like restructuring an employee’s gross salary could raise eyebrows,” said Amitabh Singh,tax partner at Ernst and Young.