The Employee Provident Fund Organisation (EPFO) is reportedly considering a proposal to allow its 60 million subscribers the choice of investing in equity beyond the 15 per cent of fresh subscriptions – the limit that has been set by its Trustees. If implemented, this will be a tremendous boost for the equity markets in India.
Despite all the work done on financial literacy and the record level of participation by retail investors in the equity markets through systematic investment plans of equity mutual funds, the penetration of equity investments still has a long way to go in our country. This is possible if the 60 million EPFO
subscribers can be converted from their current role as passive investors into active participants through the proposal of individual choice.
And the EPFO
needs to do two things to achieve this. First, careful crafting of all the choices available to a subscriber with special attention to the default choice. As behavioural studies show, more than 90 per cent people go with the default option. Hence, the default option works as a nudge in the desired direction.
So, the EPFO
would do well to learn from the ‘auto choice’ option provided by National Pension Scheme
(NPS) for non-government subscribers with its varying levels of equity and debt depending on the age and risk-taking abilities. The key in NPS
is the default option which provides for 50 per cent equity for those below the age of 35 years which progressively falls to around 10 per cent by the age of 55 years.
While I could not locate data pertaining to this, but I am reasonably sure most private sector subscribers would have fallen in this category simply by default. The number of private sector subscribers in NPS
(less than 1 million) pales in comparison to the number of corporate sector subscribers to the EPFO (60 million), and hence, the impact it will have on equity markets is very significant.
Two, the EPFO needs to craft the periodic reporting of returns and allow people the flexibility and ease of use to change their choice. Today, the annual reporting is in a rather drab format. Even if the subscribers do not exercise their choice, the very fact that this choice is easy to exercise makes it far more real. NPS
has not been able to get this part right, and EPFO should learn from the mutual fund industry for both the reporting and providing the exercise of right abilities.
Invariably in every office, there will be subscribers who will be active subscribers and their fate (good or not so good) will inspire a legion of provident fund subscribers to be more active in their choice. Even if they are not jogged out of inertia by that, their investment in long-term equity will be far higher than what it is currently.
EPFO enjoys a tax advantage that neither the NPS (only 40 per cent of the accumulated amount is tax-free) nor the mutual fund industry (10.40 per cent tax on long-term capital gains) enjoy. You can bet the trade unions will not easily allow this advantage to be taken away. If used imaginatively, EPFO has a rare chance at making history.
The author is a Sebi-registered investment advisor