Investment Management and Accounting Practices of EPFO

The Reserve Bank of India (RBI) has recommended measures to enhance the investment management and accounting practices of the Employees’ Provident Fund Organisation (EPFO), which manages retirement savings over ₹25 trillion for about 300 million formal-sector workers.

Current Investment Strategy and Yield

• The EPFO allocates: 
  1. 45-65% to government securities
  2. 20-45% to debt instruments
  3. 5-15% to equities via index funds
  4. 0-5% to short-term debt instruments
• Declared an 8.25% interest rate for FY25, while the average yield on 10-year government securities was 6.86%, with Nifty50 and BSE Sensex yielding 5.3% and 5.1% respectively.

RBI's Recommendations

• Enhance expertise in accounting, treasury/portfolio management, and actuarial assessments.
• Adopt a differentiated investment strategy for distinct asset-liability profiles of various EPFO-managed funds.
• Shift to modern portfolio management practices and apply asset allocation rules to the entire investment stock.
• Implement operational boundaries between regulatory and fund management functions to avoid conflicts of interest.
• Redesign benchmarks to match the distinct liabilities of each scheme.

Accounting and Governance Concerns

• EPFO's current accounting policy does not recognize losses or require provisioning on bad investments.
• Holdings are not marked to market, leading to potential financial misstatements.
• RBI noted the need for prudent policy, especially regarding legacy investments that have turned bad.