EPFO Explores Performance-Linked Incentives for Fund Managers
The Employees' Provident Fund Organisation (EPFO) is actively examining a significant proposal to introduce performance-linked incentives for its fund managers. This initiative would see the retirement fund body allocate a greater portion of its substantial corpus to those managers who deliver superior returns on investments.
New Benchmark Methodology Under Development
This proposal is a core component of a new benchmark methodology currently being developed specifically for debt investments, as confirmed by officials. The EPFO is concurrently assessing separate benchmarks for the Employees' Provident Fund (EPF) and the Employees' Pension Scheme (EPS), acknowledging that the EPS operates with a notably longer investment horizon.
An official elaborated on the shift, stating, "In the earlier benchmark system, the portfolio yield of a fund manager was calculated as a tenor-weighted yield. The new methodology separates the tenor from the portfolio yield calculation. Crucially, a new clause has been incorporated stating that the allocation of the portfolio to managers will vary dynamically according to their demonstrated performance."
Upcoming Committee Meeting and Broader Strategy
The Investment Committee (IC) of the EPFO, which oversees assets worth a staggering Rs 30 lakh crore, is scheduled to deliberate on these available options at a crucial meeting on February 10. This meeting precedes the highly anticipated announcement of the annual interest rate for the EPFO's nearly 30 crore members for the financial year ending March 31.
Beyond the incentive structure, the EPFO's consultation process is wide-ranging. In previous committee meetings, consultant Crisil was tasked with evaluating the feasibility of investing in emerging, sunrise sectors. These sectors include rare earths, railways, and defence. Crisil's mandate also extended to examining the yields of various sectoral, factor, and style-based indices.
The sectors assessed encompass indices tracking banking and financial services, information technology (IT), global indices, and fast-moving consumer goods (FMCG). Furthermore, Crisil analyzed indices focused on specific investment styles, such as those tracking momentum stocks, value stocks, and low volatility stocks, ranking some based on their risk-adjusted returns.
Drive for Diversification and Higher Returns
These comprehensive proposals are part of a broader strategic consultation within the retirement fund body. A key driver is the EPFO's objective to diversify its equity investments. Currently, its equity exposure is largely through exchange-traded funds (ETFs) that track the benchmark NSE Nifty and BSE Sensex indices.
The push for diversification and performance-linked incentives stems from a clear financial imperative. The EPFO has been announcing annual returns that exceed the prevailing yields on government bonds in recent years. To sustain this trend and generate greater income for its massive subscriber base, the organization is exploring all avenues to optimize its investment strategy and fund manager performance.
