A recent survey by global professional services firm Towers Watson says that saving for retirement is a big concern for Indian employees, with 71% of the respondents worried that they are not saving enough. In another survey conducted by ET Wealth last year, respondents listed volatility of returns (32%), low savings rate (26%) and lack of reliable financial advice (25.4%) as their biggest retirement worry.
That's surprising, because a majority of the respondents of both surveys were already investing in a product that takes care of all these concerns.The Employees' Provident Fund (EPF) managed by the Employees' Provident Fund Organisation (EPFO) ensures that an individual puts away enough for retirement every month. With 12% of his basic salary and a matching contribution by his employer, a subscriber to the EPF should be able to accumulate a decent amount by the time he retires. If someone started working at the age of 25 in April 2000 at a basic salary of `10,000 a month and got a raise of 10% every year, he would roughly have accumulated `16 lakh in his PF account by now. If the trend continues, he would have saved about `1.23 crore by the time he is 55 years old (see graphic) and more than `1.7 crore of tax-free money on retirement at 58.
Despite the tremendous opportunity, most contributors to the EPF won't reach the `1 crore milestone. More than 13% of the respondents to the ET Wealth survey withdrew their PF balance each time they changed jobs. Withdrawing from the PF can be counter-productive on two counts. One, the withdrawn amount is usually blown away on discretionary expenses and retirement savings are back to square one. Two, if the individual withdraws his PF balance before completing five years, the amount becomes taxable.
That's surprising, because a majority of the respondents of both surveys were already investing in a product that takes care of all these concerns.The Employees' Provident Fund (EPF) managed by the Employees' Provident Fund Organisation (EPFO) ensures that an individual puts away enough for retirement every month. With 12% of his basic salary and a matching contribution by his employer, a subscriber to the EPF should be able to accumulate a decent amount by the time he retires. If someone started working at the age of 25 in April 2000 at a basic salary of `10,000 a month and got a raise of 10% every year, he would roughly have accumulated `16 lakh in his PF account by now. If the trend continues, he would have saved about `1.23 crore by the time he is 55 years old (see graphic) and more than `1.7 crore of tax-free money on retirement at 58.
Despite the tremendous opportunity, most contributors to the EPF won't reach the `1 crore milestone. More than 13% of the respondents to the ET Wealth survey withdrew their PF balance each time they changed jobs. Withdrawing from the PF can be counter-productive on two counts. One, the withdrawn amount is usually blown away on discretionary expenses and retirement savings are back to square one. Two, if the individual withdraws his PF balance before completing five years, the amount becomes taxable.
Another 20% of the respondents to our survey said they dipped into the PF corpus for other needs.The EPFO allows an individual to withdraw from his PF account for specific needs, such as constructing or buying a house, children's education and marriage or a medical emergency.
Should EPF invest in stocks?
The other concern about volatility of returns is also not an issue with the PF. The EPF invests in debt instruments that deliver stable returns. EPFO rules allow the EPF to invest up to 15% of its corpus in stocks but the Central Board of Trustees has steadfastly ignored suggestions to this effect.
Many financial experts, including Finance Ministry officials, have castigated the EPFO for this aversion to stocks. They say the EPF is a low-yield debt-based scheme that can never beat inflation.At a recent meeting of the EPFO, it was pointed out that the returns offered by the EPF since 2005, when adjusted to inflation during the period, were in the negative. The `100 put into the EPF in 2005, when marked to inflation, were worth only `97 now.Experts argue that the only way the EPF can beat inflation is by investing some portion of its gargantuan corpus in the stock markets. But while the inflow of fresh investments will be good for the equity markets, they may not have the same impact on investor returns. The New Pension System (NPS) funds for central government workers are allowed to invest up to 15% of their corpus in Nifty-based stocks in the same proportion as their weightage in the index. We looked at the SIP returns of these funds in the past 5-6 years and found that they were not significantly higher than what the 100% debt-based EPF has churned out. In fact, two of the funds have actually given lower returns (see EPF did better than NPS). This despite the fact that these funds have invested right through the bear phase of 2008-9 and the markets are at all time high levels right now. Our calculations are not based on point-to-point returns but on SIP returns. We took into account the NAVs of the first reporting day of each month and then worked out the internal rate of return.
Don't shun equities altogether
Having said that, we must add that a certain portion of your retirement savings should certainly be allocated to equities. It's only that this equity exposure need not be through the EPF. Any retirement plan has to be a combination of several investments. Keep the EPF as the debt portion of your retirement plan and invest 5-20% in equities through a diversified fund.
Interestingly, though the pension fund managers of these NPS funds can invest up to 15% of the corpus in equities, they have allocated less than 8% to stocks. "Pension fund managers have been conservative because markets have been volatile.The negative impact of equity is magnified in the short term so they have shied away from maxing the equity exposure to 15%," says Manoj Nagpal, CEO of Mumbai-based wealth management firm Outlook Asia Capital.
Compulsory and linked
The third concern about the lack of reliable advice is also laid to rest by the EPF. It is compulsory and an individual has no option but to contribute to it.What's more, it ensures regular savings. According to estimates by HR firms, the average hike this year was 10.5%. How much was your hike? More importantly, did you increase your SIPs by the same proportion? Not many people care to do that. They spend more, buy more, party more but keep investing the same amount.
The EPF is different. Your contribution is linked to your income, so when you get a pay hike, your EPF contribution will go up in the same proportion.If your basic salary is `30,000 a month, you will be contributing `3,600 plus a matching contribution by your employer. If you get a 20% hike and your basic becomes `36,000, your contribution will automatically increase to `4,320. This is a great way to build a corpus in the long-term.
The icing on the cake is that you can invest more than 12% of your basic salary. Millions of Indians welcomed the move when the budget hiked the annual investment limit in the PPF to `1.5 lakh. But Delhi-based PSU manager Naveen Parashar was not one of them. "I can't understand why salaried taxpayers are so excited about this development.They have always had the option to invest in the Voluntary Provident Fund (VPF) and get the same tax benefits offered by the PPF," he says nonchalantly. Parashar puts an additional `14,700 into the VPF every month, taking his overall contribution to the EPF to `31,700 a month. This forced saving has helped him build a sizeable corpus in the past 15 years.
Central Provident Fund Commissioner K.K.Jalan echoes Parashar's views. "The VPF is an ideal saving instrument for high-income earners looking to build a tax-free corpus. Unlike the PPF, there is no limit to how much one can invest," he says (see interview).
The new look EPFO
The EPFO is fast shedding its dowdy image and using technology to turn into a more professional and nimble organisation. It has made several other investor-friendly changes in the past 12 months.Last year, it introduced the online facility for transferring the balance to a new account. This year, it has made it possible to check the account online.Going forward, all members are expected to have a Universal Account Number and this will be portable across employers and cities. In fact, UANs have already been allotted to 4.17 crore active contributors to the EPF. In the first four months of this financial year, the EPFO settled nearly 43 lakh claims. Of these, more than 68% were settled in less than 10 days.
Should EPF invest in stocks?
The other concern about volatility of returns is also not an issue with the PF. The EPF invests in debt instruments that deliver stable returns. EPFO rules allow the EPF to invest up to 15% of its corpus in stocks but the Central Board of Trustees has steadfastly ignored suggestions to this effect.
Many financial experts, including Finance Ministry officials, have castigated the EPFO for this aversion to stocks. They say the EPF is a low-yield debt-based scheme that can never beat inflation.At a recent meeting of the EPFO, it was pointed out that the returns offered by the EPF since 2005, when adjusted to inflation during the period, were in the negative. The `100 put into the EPF in 2005, when marked to inflation, were worth only `97 now.Experts argue that the only way the EPF can beat inflation is by investing some portion of its gargantuan corpus in the stock markets. But while the inflow of fresh investments will be good for the equity markets, they may not have the same impact on investor returns. The New Pension System (NPS) funds for central government workers are allowed to invest up to 15% of their corpus in Nifty-based stocks in the same proportion as their weightage in the index. We looked at the SIP returns of these funds in the past 5-6 years and found that they were not significantly higher than what the 100% debt-based EPF has churned out. In fact, two of the funds have actually given lower returns (see EPF did better than NPS). This despite the fact that these funds have invested right through the bear phase of 2008-9 and the markets are at all time high levels right now. Our calculations are not based on point-to-point returns but on SIP returns. We took into account the NAVs of the first reporting day of each month and then worked out the internal rate of return.
Don't shun equities altogether
Having said that, we must add that a certain portion of your retirement savings should certainly be allocated to equities. It's only that this equity exposure need not be through the EPF. Any retirement plan has to be a combination of several investments. Keep the EPF as the debt portion of your retirement plan and invest 5-20% in equities through a diversified fund.
Interestingly, though the pension fund managers of these NPS funds can invest up to 15% of the corpus in equities, they have allocated less than 8% to stocks. "Pension fund managers have been conservative because markets have been volatile.The negative impact of equity is magnified in the short term so they have shied away from maxing the equity exposure to 15%," says Manoj Nagpal, CEO of Mumbai-based wealth management firm Outlook Asia Capital.
Compulsory and linked
The third concern about the lack of reliable advice is also laid to rest by the EPF. It is compulsory and an individual has no option but to contribute to it.What's more, it ensures regular savings. According to estimates by HR firms, the average hike this year was 10.5%. How much was your hike? More importantly, did you increase your SIPs by the same proportion? Not many people care to do that. They spend more, buy more, party more but keep investing the same amount.
The EPF is different. Your contribution is linked to your income, so when you get a pay hike, your EPF contribution will go up in the same proportion.If your basic salary is `30,000 a month, you will be contributing `3,600 plus a matching contribution by your employer. If you get a 20% hike and your basic becomes `36,000, your contribution will automatically increase to `4,320. This is a great way to build a corpus in the long-term.
The icing on the cake is that you can invest more than 12% of your basic salary. Millions of Indians welcomed the move when the budget hiked the annual investment limit in the PPF to `1.5 lakh. But Delhi-based PSU manager Naveen Parashar was not one of them. "I can't understand why salaried taxpayers are so excited about this development.They have always had the option to invest in the Voluntary Provident Fund (VPF) and get the same tax benefits offered by the PPF," he says nonchalantly. Parashar puts an additional `14,700 into the VPF every month, taking his overall contribution to the EPF to `31,700 a month. This forced saving has helped him build a sizeable corpus in the past 15 years.
Central Provident Fund Commissioner K.K.Jalan echoes Parashar's views. "The VPF is an ideal saving instrument for high-income earners looking to build a tax-free corpus. Unlike the PPF, there is no limit to how much one can invest," he says (see interview).
The new look EPFO
The EPFO is fast shedding its dowdy image and using technology to turn into a more professional and nimble organisation. It has made several other investor-friendly changes in the past 12 months.Last year, it introduced the online facility for transferring the balance to a new account. This year, it has made it possible to check the account online.Going forward, all members are expected to have a Universal Account Number and this will be portable across employers and cities. In fact, UANs have already been allotted to 4.17 crore active contributors to the EPF. In the first four months of this financial year, the EPFO settled nearly 43 lakh claims. Of these, more than 68% were settled in less than 10 days.
