Putting provident funds at risk

Published February 17, 2014
- Illustration by Abro
- Illustration by Abro

The draft rules on investment by employees’ provident funds in listed securities, released by the Securities and Exchange Commission of Pakistan earlier this month, have come under strong criticism from corporate employees, mutual funds, bankers, accountants and sympathisers with the working class alike.

The rules, titled ‘Employees Provident Fund (Investment in Listed Securities) Rules, 2014,’ replaces the ‘Employees’ Provident Fund (Investment in Listed Securities) Rules, 1996’.

The new regulations allow investment in ‘listed securities’ at as high as 70pc of the size of employees’ provident fund (PF). The ‘listed securities’ have been specified as shares, bonds, redeemable capital, debt securities, equity securities and listed collective investment schemes (mutual funds).

The rules go on to specify that total investment in listed equity securities ‘except money market collective investment schemes [meaning perhaps money market funds] shall not exceed 30pc of the size of employees’ provident fund’.

It is abundantly clear that the amount of money in PFs allowed to be invested in listed securities has been phenomenally increased. The repealed rules of 1996 had capped such investment in risky listed securities at just 10pc of the PF.

Analysts argue whether the new rules permit up to 70 or 30pc of the total PF to be invested in listed securities, but, in either case, the quantum leap from 10pc of the provident fund allowed in the earlier rules has all the ingredients of enriching stock brokers at the cost of unsuspecting employees, whose lifelong hard-earned money is being put at risk.

A senior SECP official, who asked not to be named, while agreeing with the concern shown by this scribe, contended that returns from investment in fixed income securities do not cover inflation, which was why a mix of investment avenues was suggested.

“If you hedge against risk, you have to compromise on returns,” he said, but admitted that the safety of the funds should be a priority.

Several veteran money managers of companies recall that in the past, employee funds could be invested only in risk-free government guaranteed instruments like defence saving certificates to ensure their complete safety.

Since the collective amount of all employee money in PFs of all corporates could run into billions, some observers are suspicious that stock brokers exercised their influence for rules to be changed in favour of investment in shares.

But a stock broker argued that exceedingly high reward is the right reason to invest in stocks. He proudly referred to the 90pc return posted by the stock market in two years since January 2012. The broker, however, conveniently forgot the 2008 stock crisis, which had eroded half of investors’ wealth.

A provident fund is the collective amount retained by an employer — usually 10pc from the basic pay of employees each month — that is deducted at source, over the entire term of employment, which could stretch to decades. Could the employer holding employee funds have the right to invest such an amount in the high-risk stock market?

Mir Mohammad Ali, a Wall Street-based investment banker who is currently working on a project in Karachi, concurs with the popular view. He says investment in emerging and frontier markets is very risky, and a huge amount of cash invested in listed securities in markets like ours, where suspicions of unfair deals and insider trading abound, is putting the funds into peril.

He suggests that if at all employee money needed to be invested in listed securities, the amount should be limited to 10pc, which could be invested only in ‘defensive stocks,’ for a long-term of say three years, unless fundamental changes warrant an earlier sell-off.

He says in high income countries like the US, managed pension funds like Individual Retirement Accounts (IRAs) and 401K plans are highly regulated. “Corporates would sit on cash rather than invest employees’ money in risky ventures,” he asserts.

A senior auditor, Abbas Karjatwala, agrees with the wider view that no one should have the right to put in jeopardy the entire savings of employees, which sometimes is the only sum through which they fend for themselves and their families after retirement.

He notes that if a PF committee (usually dominated by employers’ representatives) decides to dabble in shares, it should be allowed the luxury only if the employer is willing to underwrite the investment: To distribute profit to employees in case of good returns and to reimburse losses when the invested money is eroded.

The anxiety over the passage of new PF rules is running high. Senator Saeed Ghani, a one-time labour leader, called this scribe to say that he would raise the issue in the upper house of parliament.

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