The Employees’ Provident Fund Organisation (EPFO) currently earns a uniform 8.25% return for its subscribers, applying the same conservative investment strategy regardless of whether an employee is 24 or 54.
Under the present framework, EPFO invests 85% of its funds in fixed-return debt instruments, while capping equity exposure at 15%. This identical formula applies to all members without individual choice or input.
Serving as India’s largest retirement fund for private-sector workers, EPFO settles over 60 million claims annually and supports more than 8 million pensioners. It has delivered a flat return of 8.25% over recent years.
Equity debate
A growing debate has emerged between different age groups regarding investment flexibility. The younger crowd wants more equity exposure, even as high as 100%. They point to historical stock market returns ranging from 15% to 50% annually.
Younger workers have decades before retirement, making time their biggest asset to ride out market cycles and earn higher long-term compounding gains.
Conversely, risk-averse members wish to keep it safe, emphasising that retirement savings require absolute capital protection rather than speculative growth.
Mandate of safety
EPFO’s primary mandate is to protect subscriber savings rather than maximise market returns. For this reason, the fund historically allocates only 10% to 11% to equity instruments, playing it even safer than its allowed 15% ceiling.
Unlike individual investors who can hold assets during market downturns, EPFO is required to sell equity annually to book real profits and meet fixed annual payout obligations.
Market shocks during events like the Covid pandemic and geopolitical tensions underscore the risk of equity volatility for workers nearing retirement who need guaranteed liquidity.
Systemic challenges
While the National Pension System (NPS) allows subscribers up to 100% equity allocation, EPFO operates on a far larger operational scale. Introducing individual choices across 60 million annual claims could create administrative inefficiencies that threaten overall system stability.
Experts suggest that EPFO could instead consider gradually raising its equity cap in 5% increments over time, while introducing limited choice options combined with subscriber financial education.
Ultimately, managing retirement funds requires balancing risk against return, ensuring that workers’ lifelong savings remain secure while meeting post-retirement financial needs.