Wednesday, October 22, 2014

Portable PF source business line

Direct access to PF accounts will address the issue of dormant accounts and lead to better social security cover
It may be an exaggeration to call it a labour reform, but Prime Minister Modi’s announcement that Employees’ Provident Fund (EPF) accounts would be made portable by allotting unique identification numbers to its subscribers will bring cheer to lakhs of organised sector employees. The EPF is today the default retirement vehicle for Indian employees and contributions to it are compulsorily deducted from one’s salary and matched by the employer. Yet, due to archaic administration and operation of the scheme, it mostly fails to function as an adequate social security net for workers at retirement.
To start with, though provident fund balances essentially belong to employees, they are forced to access these accounts primarily through the organisations which employ them. Thus, whenever the employee switches jobs, as one does quite often these days, transferring the provident fund balance from one firm to another is quite a cumbersome task, with forms to be filled and correspondence to be routed to the Employees Provident Fund Organisation (EPFO) via both the employers. The EPFO can be quite tardy with processing these requests too, buried as it is under tons of paperwork. (In 2013-14, it processed 1.2 crore transactions and 12 lakh transfer requests.) With many employees either choosing to skip the transfer or simply unaware of the procedure, the EPFO has become saddled with an enormous number of inoperative accounts. According to its last annual report, as many as 5.8 crore out of the 8.9 crore accounts managed by the EPFO were inoperative, with sums idling in them at ₹27,000 crore. Apart from creating needless workload for the EPFO itself, inoperative accounts represent a significant opportunity loss to the employees, as accounts without contributions earn no interest after three years. These idle PF balances have also attracted scamsters, with reports of funds being siphoned off through spurious bank accounts. Given this backdrop, subjecting the EPFO database to a comprehensive Know-Your-Customer exercise, computerising the records and mapping each account to the employee, will help iron out these problems and lead to a better investing experience for subscribers. Allowing employees to seamlessly port their accounts between employers will also ensure that the EPFO serves its basic objectives more effectively. Presently, most employees withdraw their PF every time they shift jobs leaving them with hardly any nest-egg at retirement.
While the benefits of direct employee access and PF portability are indisputable, the Centre should examine if it is really necessary to allot new unique account numbers to EPFO subscribers to operationalise these initiatives. Between Aadhar, voter identification number, permanent account number and numerous KYC formalities for financial products, the ordinary saver already has to deal with one too many KYC checks and ‘unique’ numbers. It would be ideal if the PAN or the Aadhar could double up as the identification that the EPFO uses to grant PF portability to its subscribers.
(This article was published on October 21, 2014)

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