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mains Test Series 2018
Q. EPF and NPS investment: Discuss the disparity between EPF and NPS and provide suggestions.
Dec 21, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently the Employees’ Provident Fund Organisation (EPFO) has reduced the interest rate on provident fund savings from 8.8% to 8.65% for 2016-17. Retaining current interest rate would have created a deficit, as Employees’ Provident Fund (EPF) earns too little profit in comparison to National Pension System (NPS). Hence observers are arguing that government can make window to migrate EPF to NPS if workers desires.

Comparison of EPF with NPS-

  • The EPFO invests the bulk of its corpus in government bonds, the rest in securities issued by banks, public sector enterprises and a minuscule 5% of its incremental deposits in equities. 
  • However, returns of EPF have been suboptimal compared to the NPS that has lower assets under management but offers superior returns to its subscribers.
  • Recent report on the performance of private sector pension funds shows that the seven fund managers have consistently delivered higher returns to their subscribers compared to the EPFO. 
  • The one-year average return on government bond fund stood as high as 16.88%, and the return on corporate debt fund at about 15.52%. 
  • The NPS has the lowest asset management fees and its corpus will grow, if more workers join, enabling more diversification and risk-taking. 
  • So, the case for the government to swiftly fulfil its Budget promise, to let workers leave the EPF and join the NPS if they choose to, is compelling.

Suggestions-

  • Both the EPFO and the NPS must diversify across asset classes that include private equity, real estate and start-ups to distribute risk and maximise returns. 
  • Similarly the government should also ensure parity in the tax treatment of the EPFO and the NPS. Reform to allow workers build a decent retirement nest brooks no delay.

Conclusion-

There is absence of parity in NPS and EPF, hence EPF holders receives comparatively less returns that NPS holders. Prudent fund management is warranted, given that a recent cut in the interest rate will impact bond yields. This disparity can be addressed by opening the window of migration from one to another.


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