Was proposal to allow switching from EPF to NPS good for you?

Last week, the govt decided to junk the proposed provision to allow switching from EPF to NPS because the two instruments serve different purposes in terms of the benefits they provide. Disha Sanghvi asked 4 experts if such portability could have benefitted investors in any way

Earlier in 2019, the labour ministry proposed certain changes to the Employees’ Provident Fund (EPF) Act, including an option that allowed members to switch from EPF to the National Pension System (NPS). However, last week, the government decided to junk this provision because the two instruments serve different purposes in terms of the benefits they provide. In withdrawing the option, has the government robbed investors of an opportunity to take more equity exposure for their retirement corpus? Disha Sanghvi asked four experts if such portability could have benefitted investors in any way

Such a shift could have facilitated better planning

Sumit Shukla, Chief Executive Officer, HDFC Pension Management

Retirement planning is a must for every individual and the kind of instruments you choose plays an important role. The proposal to have the choice to transfer your corpus from EPF to NPS was a progressive reform and could have helped investors plan their retirement better.

The transfer would have given more flexibility to EPF subscribers in terms of investment in equity, choice of asset class, portability, and others. Also, in NPS, the entire investment performance of fund managers is monitored and tracked, giving investors a choice to move between funds and managers.

The tax treatment in both products is EEE (exempt-exempt-exempt) but the limitation of 40% mandatorily going from NPS to annuity products would have been a deal breaker. If 40% annuity taken from NPS is also made tax-free, then such a transfer would have been seamless.

The government should also bring all the pension products under the Pension Fund Regulatory and Development Authority.

Not allowing the switch is like taking a step back

Rituparna Chakraborty, Co-founder and executive vice-president, TeamLease Service

Large mandatory deductions from salary like EPF, EPS and ESI (Employees’ State Insurance) are perceived as poor products because they offer rotten service, entail high costs and have no competition.

As a recourse, we have been recommending providing employees three options: a) to contribute their share of PF (Social Security Code Bill 2019 has legitimised this) or not; b) to contribute to ESI or to an independent scheme approved by the Insurance Regulatory and Development Authority of India; c) to contribute to EPS or NPS.

We should end the sham of EPS; it has an estimated 50,000 crore funding deficit and is unsustainable. We should revert to the pre-1991 situation where the 12% employer contribution went into a defined contribution account and allow employees to pay their 12% contribution to EPF or NPS.

The move to scrap the idea of allowing employees the choice between EPF and NPS is like taking a step back into the past and being held hostage by EPFO.

With NPS, you can opt for higher equity exposure

Lovaii Navlakhi, Managing Director and Chief Executive Officer, International Money Matters

We live in an age where portability is the norm, not an exception and where consumers are free to choose their service provider based on cost and convenience. Imagine telling a landline user that he can’t switch to a cellphone because he already has a communication device.

New products introduce new features and the latest technology. Why can’t users benefit from those? The cost of managing these come down with scale and NPS has the benefit of being set up with low costs.

But with life expectancy rising, beating inflation and making sure your money does not run out before you do, requires exposure to equity. Why should a 30-something not be allowed to have more than the 15% allocation to equity that EPF contributions are restricted to? For those with an eye on the future, accepting newer products and opening closed doors is natural. While the powers that be worry about protecting their turfs, they ignore the reality that the ground is being pulled from under their feet.

Low-income group prefers guaranteed, safe returns

Kuldip Kumar, Partner and leader, personal tax, PwC India

While presenting Budget 2015-16, then finance minister had announced that employees could choose between EPF and NPS. Subsequently, the labour ministry came up with a draft Social Security Code (SSC), 2019, which provided an option to EPF subscribers to switch to NPS. The detailed rules were to be notified later.

But after dissent from various quarters, the government dropped this proposal from SSC.

One may argue that by not providing such an option, the government is denying the opportunity to individuals to better their returns as NPS provides the option to allocate funds in various investment modes. In NPS, returns are based on performance and not guaranteed. However, EPFO has been consistently giving better returns on accumulated PF balances and benefits such as family pension, benefits on permanent and total disability, among others, especially to the lower-income group for whom safety of money and returns are important factors.

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