Provident Funds

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PROVIDENT FUNDS

Investment guidelines for exempted and non-exempt provident funds should be prudently liberalised and investment portfolios further diversified in order to obtain superior returns and better risk management. Trading of securities in the secondary market should be permissible. Initially, investment guidelines for fresh accretions as well as earnings from investment of the existing fund should be modified to allow investment of up to 20% of the funds into investment grade corporate debt and up to 10% in domestic equity. Domestic equity investments should initially be permitted only through index funds on either the NSE-50 or the BSE National indices.

The Boards of Trustees of exempt and non-exempt provident funds should be made more compact and effective. The Boards should generally not be larger than 15 persons, of whom at least one-third should have an advanced degree and/or experience in finance or economics.

Increase in Coverage

The existing restriction limiting provident fund contributions to 177 industries/ classes of establishments should be abolished.All establishments should be covered by provident funds.

The minimum number of employees in an establishment should be lowered from 20 to 10, and eventually to 5.

The wage ceiling of Rs.5,000 should be abolished; all employees in eligible establishments should be covered.

Intensive efforts should be undertaken to educate people about the need for, and benefits from, security schemes, and not to resort to early withdrawals.

These steps will collectively increase the number of establishments covered by provident funds by 0.26 million – thereby benefiting an additional 6.25 million individuals who will become eligible for provident fund and the employee pension
scheme.

Others

Each provident fund member should be allotted a unique identification / account number spanning across all Provident Funds - for comprehensive portability of account during job changes and temporary unemployment.

Lump-sum contribution both by the employer and the employee for the last 3 month's instalment (before retirement of employee) should be made mandatory to facilitate timely completion of administrative procedures and prompt disbursal of accumulations on retirement.

The "Provident Fund Account" should be renamed "Employee Retirement Account (ERA)'' to clarify its true objective.

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