To begin with The EPF & MP Act 1952 is applicable to establishments having 20 or more employees. Sec 17 of the Act and Para 27A of the Scheme provide for exemption of the entire establishment and of class of employees respectively. Under the exemption provisions the establishment maintains an EPF trust and the PF contributions of all its employees or a class of employees as the case may be, is deposited into that EPF trust. Typically, this EPF trust is maintained by the establishment by employing experts personnel in HR team and finance team.
Let us first check what were the reasons the establishments preferred EPF trust under the exemption provisions rather than depositing the employees PF contribution with the government administered EPFO and are these reasons relevant today?
(a) Better Returns : – In old days i.e. prior to Y2K, most of the EPF trust were able to generate better returns than the EPFO primarily because EPFO functioned more as an enforcement body than as a financial organization. So it was more interested in inspections than managing the money properly.
(b) Shared responsibility : – Exempted EPF trust must have equal representation of employees and employers in its Board of trustees. Thus the management and employees both worked together to get better returns and have good administration of the trust.
(c) Cost of Trust administration :- During the Previous years i.e. prior to December 2014, the administrative charges taken by the EPFO under A/c 2 was 1.1 % of the Total wages. This was much higher than the cost of Trust administration. Trust administration cost includes salaries of the employees managing the trust, accounting costs, banking charges, Demat and brokerage charges, hardware and software costs, etc
(d) Service Delivery :- The most important factor that was tilting the game in favour of the EPF trust was Service Delivery. In old days i.e. prior to year 2014, all the EPF claims like transfers, advances, withdrawals and death cases settlements were completely manual and at the mercy of the EPFO clerk and accounting officers. Practically there was no transparency and accountability. The situation was so bad that Union Finance minister Shri Arun Jaitely in his Budget speech had referred to EPFO subscribers as “hostages, rather than clients”. In old days of manual settlements the claims used to be settled anywhere from 6 months to 1 year and varied from EPFO office to office and from clerk to clerk. In the EPF trusts of the company/ establishment, the claims were settled within a few days.
Fast forward 2021: – are above reasons relevant anymore? I would Say many of the above mentioned issues are resolved by the EPFO. On top of that many new restrictions have come in for the EPF trust. Couple that with changing scenario of manpower hiring in the industry Where it has become fashionable & potentially economical to employ the workforce as Contract Labour rather than direct employee
a) Returns :- Due to supermassive Corpus Fund next only to LIC Of India and the changes in investment pattern approved in recent years, the EPFO has raced ahead of others in generating good returns over the money invested. The rate of interest declared by EPFO for financial year 2020-21 is 8.5 % and that too without dipping into its reserves or seeking help from the finance ministry. Contrary to this, In the present low interest rates regime, most of the Exempted EPF trusts, especially the smaller ones, have failed to extract the necessary yield to required to give the interest at statutory rates declared. Consequently this interest deficit has to be fulfilled by dipping into the reserves. Where there are no reserves left, the deficit has to be made good by the establishment/ company. Also investment losses, like for example defaults of DHFL bonds & ILFS bonds and the likes, has to be borne by the company. This is becoming the greatest challenge in maintaining the overall viability of the Exempted EPF trusts in recent times.
b) Cost of Trust administration :- With the reduction in A/c 2 charges to a mere 0.5 % of the wages, this advantage of the exempted trusts is gone. On a comparative basis, after paying the inspection charges of 0.18% the trust is left with only 0.32% amount in which it has to manage its administrative costs. As on today this is a difficult task especially for a small EPF trust. This advantage remains only in case of EPF Trust having very large number of employees base and a big Corpus.
c) Service Delivery :- This is one particular area where the performance of the EPFO has improved dramatically and by leaps and bounds. Since 2012 i.e when the online service delivery started, the process at EPFO has evolved very well and now almost all the documentation and claims are online. The process of online claim has accelerated even further during the pandemic era
d) Lack of Succession planning : – In old days establishments used to appoint special personnel only for taking care of the EPF trust. Nowadays this is not happening and the new HR personnel do not know much about management of the EPF trust. The HR personnel are not well versed with the compliance requirements and investment pattern of the EPF trusts. Naturally it becomes difficult for them to manage EPF for trust. On top of that, during recent times most of the companies have stop recruiting special personnel to handle the EPF trust. They are now facing a very challenging task of succession planning. EPF trusts are not able to find good Successors for managing and administering it properly.
e) Increase in the compliance burden and stringent rules :- EPF trust has to follow more than 31 rules provided in Appendix A of para 27AA and countless notifications that keep on publishing every now and then. These are not easy to implement especially by small EPF trust. In case of breach of compliance conditions, the EPFO is well within its right to cancel the exemption of the PF trust. one such example of among various rules is that the EPF Trust has to maintain employee balances Online i.e. the employee must be able to access their EPF passbook in real time basis. As on today most of the small EPF trust find it difficult to implement this simple rule.
f) Permission for security sale :- In old EPF trusts it is found that there are retirements every month and money is required to pay the retiring employees. Generally such amount of cash is not readily available with the EPF trust and thus has to be planned well in advance. To generate cash EPF trust has to liquidate securities by selling them in open market. Before liquidating securities The EPF trust must obtain permission from the PF Commissioner for sale of the securities. The PF commissioner will give permission for sale of securities keeping in mind the investment pattern notification and overall welfare of the EPF trust. It takes three to six months to obtain such permission for sale of securities. This daunting task has become really challenging in this pandemic era.
After overall analysis, We are of opinion that it is more advantageous in long term for smaller EPF trusts (Generally having less than a thousand live employees) to surrender the EPF trust exemption and go for unexempted Government administered EPFO.
The author is an expert in Labour and Employment Laws and specializes in The EPF & MP Act compliances & EPF Trust management. You may reach him be emailing to firstname.lastname@example.org.
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