Does EPF still make sense?

Like every employee who joins a company in the organized sector, I too was forced to open an account under the Employee Provident Fund scheme. So far I've had a pretty bad experience with the scheme. Over the years I have faced lots of issues with it. This post started as an investigation on EPF. It started more like weekend project to check if EPF still has value in today's day and age where employees are financially educated and better retirement products exists. Let's start from the beginning...

What is EPF? 🤔

The Employee Provident Fund (EPF) is a scheme that helps people save up a sufficient corpus for retirement. The plan was introduced with the Employees' Provident Funds Act in 1952 and is today managed by the Employees' Provident Fund Organisation (EPFO).

Source: ETMoney

As per the law, every employee has to put 12% of their salary (=Basic Salary + Dearness Allowance) in their EPF account every month. The employee has no say in this. An employee cannot choose not to put the money in the EPF account. It is a must. On the surface, this seems to be a bona-fide attempt by the government to ensure that every citizen can live in prosperity during retirement. But as one gets deeper, the cracks start to show up.

The points I showcase here are all taken from my personal experience with the scheme.

Issue 1: The Rules 📏

The rules of the scheme are old school and atrocious. The rules and regulation are so complicated that most of the companies hire EPF consultants. Even HR professionals don't like to deal with EPF rules and EPFO branch offices. Heck, there are YouTube channels dedicated to just the EPF scheme. In fact, the regulation and compliance situation in India is so bad that Kiran Mazumdar-Shaw, the chairperson and managing director of Biocon Limited, rightly pointed out, companies have no time left for business activities after meeting all the compliances.

Kiran Mazumdar Shaw: After meeting compliances, bizmen have no time to run cos - https://t.co/Lu5cP3GbHz #GoogleAlerts

— Kiran Mazumdar-Shaw (@kiranshaw) November 23, 2019

Issue 2: Built for Digital India Paperwork 📃

The scheme was built around offline mode of work. The same is true for today. Even in 2020, EPFO hasn't been able to completely digitize the scheme. Digital services are more important than ever in these challenging times. The parts which have been digitized don't work reliably. As a software engineer, who specializes in web development, I can tell you the bugs that creep into the production environment should've been caught in the development stage. It's not just that the developers hired for the job are incompetent, the internal processes are also terrible. The web portals have been built and are maintained like it's 2010.

So what is my issue with offline mode of work? If you ever had to deal with a government official you know how difficult it is to get the work done. Paperwork gets put in a file and locked away. There's no way of tracking and there is no way of escalation, not without speaking with good-for-nothing people. People who have neither the will nor the technical knowledge required to help you. One of my friends who works in the State Bank of India told me once that her 10 to 4 job is so difficult that she doesn't feel like going the extra mile for helping customers. And I'll leave it at that.

Issue 3: Excessive Dependence on Employers 🏢

One of the most annoying thing about the scheme is its needless reliance on the employer.

• Want to transfer your funds? Submit documents to your employer
• Want to verify your KYC documents in the portal? Contact your employer.
• Previous employer didn't add your exit date? Contact your previous employer.
• Previous employer added incorrect exit date? Submit joint declaration with your employer.

My previous employer (a staffing company) didn't add the exit date in my profile. I didn't even know there were such things like as exits date that needed to be updated. When my current employer asked me to transfer the funds from my previous account to my new account, I was stunned with an error message. I wasn't able to transfer my own hard-eanred money. But why? The error message didn't say. Like I said before, the web portal was developed by substandard developers. I contacted the present HR personnel and she called the EPF consultant. The consultant made me sign some documents and he supposedly submitted them to the EPFO branch office. Months passed and nothing happened. After scouring the Internet for hours, I figured it out. I couldn't transfer the money because the exit date wasn't added. My present HR manager called my previous employer and asked him to add the exit date. And guess what previous HR guy did? He added an arbitrary exit date! The exit date he added was after the joining date. So even after all the hard work, I still couldn't transfer the amount because of this discrepancy. Now I had to submit a joint declaration with my previous employer to EPFO branch office. My previous employer delayed the matter for months. In the end, after 3 years of leaving the company I was able to transfer the money. And according to my calculation, I had spent more money in transportation costs, papers, prints etc. trying to transfer the funds than the actual value of the funds!

Issue 4: Obnoxious Accounting 🔢

EPF's accounting is so bad that it make you want to cry. Sometimes the interest doesn't get credited on time, sometimes the contributions themselves don't show up in the passbook. Even the interest rules are unnecessarily complex. Any contribution after 25th date of a month doesn't earn interest. Say what?!!?? My employer's contribution for 2016 is still not shown in my passbook. When I lodged a grievance mentioning this delay, it swiftly disposed off by the grievance officer saying everything is in order.

Screenshot taken on EPF's passbook portal

Issue 5: Investment Strategy💰

An employee who falls in the 30% tax bracket works 3.6 months/year for the government. The government takes its cut before the employee gets their paycheck. Then EPFO takes another 12% from that forcefully. Now one may argue that it is beneficial for the employee, that they are being forced to save for the future. This is true. But for the ones who are financially enlightened, EPF offers them no choice of where their hard earned money gets invested. Someone with higher risk appetite might want to invest in the stock market. And someone with a lower appetite might be very happy with guaranteed interest. EPF scheme is not flexible enough to provide that choice. But it gets worse!

In 2015 EPFO started investing in equity markets. Since then it has only incurred losses!

While the overall cumulative return is almost -8.3% as of 31 March for its ₹1.03 trillion equity investments, its return on investments in government-backed Central Public Sector Enterprises (CPSE) ETF has given it a -24.36% return. Similarly, in the government-backed Bharat 22 ETF, EPFO’s return on investments is -19.73%. The other two ETFs run by SBI Asset Management Co. and UTI Asset Management Co. have yielded -6.19% and -10.06% for the retirement fund manager, according to official documents reviewed by Mint.

Source: Mint

But wait, it gets much worse! While EPFO decided to invest in the stock market, it didn't devise a plan on how to distribute the gains to the account holders. Even after 5 years, there is still no concrete plan on how to unitize the gains.

Screenshot taken on Mint

Now here is a question: Why the did EPFO invest in public sector ETFs when almost every financial planner advises individual investors to stay way from those instruments?

Bharat 22 ETF and other such instruments were specially designed to help the government raise cash by divesting its shares in PSUs. So why does EPF exist? To help employees build a retirement corpus? Or to force us to give our hard-earned money to the government even when the government has already taken its cut in form of taxes!

And why did EPFO choose those 2 goverment-backed AMCs in particular? When asked, EPFO said they were in a hurry and those 2 AMCs were the ones they were familiar with. Instead of doing some research and choosing the "best" AMCs to generated higher returns, they chose AMCs they were comfortable with.

This is just beyond me.

Final Thoughts 💭

Recently there was a news that EPFO is thinking about opening the scheme for self-employed citizens. But why? NPS already does that. In fact, NPS already does a lot of the things EPF is trying to do and does it in a better way. Who the hell in their right mind would choose EPF over NPS? Why build 2 redundant retirement schemes? The government must let employees choose between EPF and NPS. Or better yet, shut down EPF completely. It's just disappointing to see tax money being wasted like this. NPS is a far better product when it comes to retirement planning. It's flexible, transparent, cheap, has stricter policies, provides good customer support and enables employees to decide how their money gets invested. NPS allows additional tax deduction over and above the 80C limits. Even employer's contributions are is tax deductible. EPF makes absolutely no sense in a world where NPS exists. NPS is far from perfect though. In the next post we will explore how NPS can change for the better.