EPFO seeks to raise investments in government securities

The Employees’ Provident Fund Organisation (EPFO) wants the notified investment pattern for it to be tweaked, but without any increase in exposure to equity, which continues to be very low. The retirement fund body, with an accumulated corpus of Rs 17 trillion, has proposed that the threshold of minimum investment in debt and related instruments such as bonds issued by public and private sector units, public sector banks and debt ETFs be halved to 10% from 20% of its annual incremental deposits. EPFO wants to use the space that this relaxation will create to raise its investments in government securities.

EPFO’s annual incremental deposits are around Rs 2.3 trillion now.

The retirement fund body wants the present maximum limit of investment in government securities to be raised from 65% now to 75%. Status quo will prevail for all other category of investments, including about the present cap of 15% in equities. Equity investments have in recent years fetched EPFO higher returns, but the organisation prefers to be cautious given the current market volatility.

The change in the investment pattern has been necessitated, according to a note EPFO shared with the members of the Central Board of Trustees (CBT) ahead of their meeting held recently in Guwahati, as it was finding it difficult to meet the 20% investment criteria in corporate bonds in the absence of available options to invest in private sector bonds.

Because of some downgrades, EPFO suspended investments in private sector bond since April 2019, which, however, was lifted by CBT in its November 2021 meeting.

During the April-November FY22 period, EPFO could invest only Rs 15,500 crore or less than 9% of the mandated investment into debt and related instruments, leaving around Rs 31,000 crore to be parked in such instruments before March 31, 2022.

“Over the next three months, by March 31, 2022, there is an additional requirement of around Rs 31,000 crore investment that is unlikely to be met, if current situation of PSU supply does not change materially,” EPFO said.

If not, EPFO will have to consider investing the same amount in short maturity PSU securities ranging between three to five years which would yield around 80-100 basis point lower than longer maturity corporate bonds. This would result in a significant lowering of portfolio yield for EPFO. It may also amount to a likely breach of the investment pattern.

The lower-than-mandated investment is primarily because EPFO was finding it difficult to get enough windows to invest in debt and related investments.

Apart from restriction on investment in private sector bond, lower supply of PSU bonds, limited supply of bonds serviced by the government and a huge surplus of liquidity in the banking system over last 18-20 months are some of the reasons that are coming in the way of meeting the mandated investment criteria under the category.

For the current fiscal, CBT, the highest decision-making body of the EPFO, has recommended lowering the interest on provident fund deposits for 2021-22 to an over four-decade low of 8.1% for its nearly 6.5 crore subscribers. This is the lowest EPF interest state since 1977-78, when it stood at 8%, but still higher than the returns small savers could get under any other fixed-income schemes.

The decision to lower the rate was primarily due to the current low interest rate regime that has prevailed for the last couple of years, resulting in a reduced rate of returns for the EPFO from debt investments. The return on debt was 6.78% in 2020-21 compared with around 7.5% in 2019-20 and 8.5% in 2018-19. Debt instruments account for 85% of its total investments while the remaining are parked in equities.

Sources said EPFO has already communicated its intention to tweak the investment pattern to the labour ministry, but the ministry is yet to take a call.

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