PF interest rate hiked to 9.5%

In a pre-festival bonanza to 4.70 crore organised sector workers, the Employees Provident Fund Organisation(EPFO) on Wednesday raised the interest rate on retirement benefits by a percentage point to 9.5% for 2010-11.

The increase has taken the interest rate to a five-year high and has been made possible due to the surprise discovery of nearly Rs 1,700 crore in the suspense account. The interest rate for 2009-10 was 8.5%. The decision of the central board of trustees, headed by labour minister Mallikarjun Kharge, will be forwarded to the finance ministry for its notification. The 9.5% interest rate will result in an additional outgo of Rs 1,600 crore, which will be used from the surplus of Rs 1,731 crore in the interest suspense account of EPFO.

The surprise discovery in the suspense account was made when the board of trustees last year ordered a review of all EPF accounts since 1952. Kharge told reporters that the EPFO trustees had decided not to invest in the stock markets and would continue to follow the existing investment pattern. “We had received a letter from the finance ministry asking for parking of a portion of EPFO funds in the stock market. We have received huge opposition from CBT members who opposed the idea of investing in stock markets,” Kharge said.
The EPFO maintains a huge corpus of over Rs 300,000 crore, whereas all recognised PFs managed by it have accumulated funds to the tune of Rs 200,000 crore.
Deepankar Mukherjee, CITU national secretary who was part of the board decision, said this was a short-term measure but the government must ensure that workers get a higher interest given the fact that there is high inflation and funds are parked in government securities.
“The interest rate was as high as 12% not very long ago. It was brought down as the government felt inflation had come down substantially. Now that inflation is in double digits, it must announce an additional interest subsidy as stimulus,” Mukherjee said.

Between 1989-90 and 2000, the rate of interest on PF was 12%. It was reduced to 11% in July 2000 and thereafter the slide began. The reason for fall in interest rates was overall fall in interest rates in banks and lower inflation.

Minister of state for labour Harish Rawat clarified that the raise of an additional 1% is just for this year. Next year, the earnings of EPFO will determine the rates. “We found a surplus of Rs 1,731 crore in the suspense account and we put that before the CBT to decide,” the minister said.
In another important decision, the board of trustees decided to stop paying interest on “inoperative accounts”, thus reducing the interest burden on account of those who use this fund as an investment destination. “The accounts which are not operated for 36 months will stop getting interest,” he said.

D L Sachdev, AITUC national secretary, welcomed the decision, but said this was only a one-time security. “What the workers need is a long-term measure to be worked out and that is only possible with the government intervention,” he added.
The EPFO decision will also increase the bill of many corporates which run their own PF trusts as they will have to match the new rates announced on Wednesday.