Corporates, which are today managing their own provident funds, have decided to stay clear of the Employees' Provident Fund Organisation. This is because they fear poor servicing by the EPFO and the high cost that the organisation charges to manage these funds.

This is even as the Centre has failed to come out with a 'realistic' reduction in the stipulated rate of returns on provident funds.

Exempted funds may be forced to dig into their reserves and corporates may have to provide capital from their own balance sheet to make good the shortfall.

Today there are 3,000 exempted funds managing a corpus in excess of Rs 1,30,000 crore (Rs 1,300 billion).

The central board of trustees of the EPFO last week said it was willing to take over provident funds being managed by exempted trusts if they found it difficult to provide the stipulated nine per cent interest rate.

"The poor servicing by the EPFO means employees having to run pillar to post to get back their own contribution, and the situation gets worse when it comes to availing of loans from the accumulated funds," said a senior trustee managing the exempted funds of a leading multinational fast-moving consumer goods company.

Trustees are today weighing the cost of transferring funds to the EPFO against the interest differential in the stipulated payout. According to Amit Gopal, assistant vice-president of India Life Asset Management Company, the interest differential between the actual return on investment and the stipulated 9.5 per cent payout works out to about three per cent.

"Compare this with the annual 4.5 per cent fee on contributions levied by the EPFO for managing the funds," said Gopal.

The EPFO charges 1.1 per cent of gross wages (basic plus DA) as fees for managing funds. This, said Gopal, effectively works out to 4.5 per cent of the annual contribution.

In the case of exempted funds, the government levies an inspection charge of 0.18 per cent of gross wage.

This effectively works out to 0.75 per cent of annual contributions. Hence, from a fund that has a monthly contribution of Rs 46 lakh (Rs 4.6 million), the exchequer earns Rs 210,000 monthly if the fund is managed by the EPFO.

In the case of exempted funds, the government gets Rs 34,500 as fees to make an annual inspection.

"Financially, it is prohibitive to transfer our funds to the EPFO even looking at the interest and credit risks we face today," said a fund manager.

With interest rates south-bound and the stickiness of the stipulated rate of return on provident funds, a three-year old fund can sustain a return of 8.25 per cent against the stipulated 9.5 per cent.