In IL&FS crisis season, why you should be worried if your PF money is with exempt trust

Exempted firms not overseen by EPFO have adopted govt guidelines that pertain to investments but there is no one to monitor if these are followed

Pedestrians and shoppers walk past stores on a street in Varanasi (representational image) | Photo: Dhiraj Singh | Bloomberg

The lack of any government supervision on “exempt trusts” – those run by companies that manage their employees’ savings on their own and not through the Employees Provident Fund Organisation – has the potential to put under risk life savings of thousands of people in the country.

If there’s anything that the IL&FS crisis has shown, it is that there has to be a mechanism in place that not only governs financial firms and institutions but also keeps a tab on their day-to-day functioning.

On 18 February, ThePrint reported that at least 200 exempt trusts, which could still be holding the IL&FS bonds despite the company defaulting on payments, have failed to file returns to the EPFO. Many of these trusts had not even reported what they were holding.

It is now reported that the EPFO has asked these trusts to assess their holding of the IL&FS bonds and report back to it. Currently, the EPFO does not know how much of the defaulting company’s assets are held in these provident funds.

The government needs to review the system under which these “exempt trusts” manage the provident funds of their employees, who are mandated to invest nearly 25 per cent of their salary to the EPF account every month.

These “trusts” or “investment committees” are unregulated and run by non-professionals. The EPFO takes no responsibility for their monitoring. Investment committees need to be monitored on guidelines, investment portfolio disclosures, mark-to-market (which determines the market value of investment) or net asset value. Today, few workers know whether their provident fund money holds downgraded bonds such as those of IL&FS and Dewan Housing. The fundamental principle of consumer protection requires that each provident fund account holder receives a monthly statement of the investment portfolio and the market value of her assets. This is not happening today.

The EPFO’s move to seek assessment report from the exempt trusts has been prompted by the fact that they hold provident funds to the tune of Rs 3 lakh crore.

According to reports, the EPFO’s own investment in IL&FS bonds is Rs 574 Crore.

At the time of the first default in August 2018, it was reported that out of the total liabilities of more than Rs 91,000 crore , provident and pension funds were holding Rs 20,000 crore of IL&FS bonds outstanding.

If only Rs 574 crore is held by the EPFO, then the remaining is likely to be held by provident funds that are controlled by the exempt trusts.

There are three important reasons why provident funds, both under EPFO and those held by these exempt trusts, may be a source of concern.

First, taxpayers’ money gets used when there is a loss. During the UTI crisis in 2001, the EPFO demanded that the government make up for the entire loss it incurred on account of the UTI. In the case of IL&FS too, the government could meet the EPFO’s loss through taxpayers’ money. Though, admittedly, exempt trusts are less likely to be bailed out using taxpayers’ money. It will be the employees who are likely to pay.

Second, new members enter the EPFO regularly while sometimes members leave without claiming their provident fund. The corpus, including the unclaimed money, is large. In 2015, it was reported that Rs 27,000 crore was lying unclaimed.

Third, the EPFO is run by professional funds managers. These are SEBI regulated, just as all mutual funds are, but there is no specific mechanism for the EPFO to supervise whether they follow investment guidelines.

Whose responsibility is it to regulate the trusts and oversee their management? So far, it looks like nobody’s.

The EPFO has clearly said that the responsibility of these funds and their performances does not lie with it.

Guidelines for investment are provided by the government. Exempt trusts have also adopted these guidelines. However, there is no one to monitor whether the guidelines are followed. Employees are not provided the investment portfolio of their savings at a regular basis. They are not informed about the net asset value of these portfolios. There is little oversight over the investment committees by the establishments themselves.

Consequently, while EPFO members may not experience a loss due to investments in IL&FS, exempt provident trusts may do so. This situation clearly points towards the need to for reform.

There are many issues with the existing system.

Not only is it mandatory to invest a part of your salary every month, the government’s encouragement by providing tax benefits under Section 80C makes other options such as the professionally managed NPS less attractive.

Moreover, the government’s guidelines for investment include requiring the trustees to invest in AAA rated bonds. IL&FS, through its management and ownership structure, managed to create an impression of being a government company.

All of this encouraged investment in IL&FS bonds. While the loss may have to be borne by members, the principles of good financial sector regulation where there is transparency and accountability need to be brought in.

It is time for the government to review the EPFO and exempt trusts system as a whole.

Ila Patnaik is a Professor at the National Institute of Public Finance and Policy.

This article was updated to include some additional information.