A leading business daily recently carried an article on a proposal being considered by the EPFO (Employees' Provident Fund Organisation). EPFO is considering putting a restriction on premature withdrawals of provident fund contributions before the age of 58 years.

In simple words, the present system, wherein employees can encash sums lying in their EPF account on termination of employment could be a thing of the past.

Instead contributors will be given a Scheme Certificate; the same shall be used to re-enter the scheme when the individual opts for a new employment.

While the argument put forth, i.e. withdrawals from a long-term investment avenue leave investors with a lower corpus on retirement, holds good, the move could prove to be detrimental for a number of EPF contributors.

For example, if an individual at the age of 45 years wishes to discontinue his present employment and venture into a business activity. Assuming that he has been employed for the last 20 years, his EPF kitty would have swelled considerably by now; the same could have been utilised as seed capital for his new venture.

However, if the new proposal is in place, he will not be eligible to access his monies for 13 more years, i.e. until he attains 58 years of age!

We at Personalfn have on numerous occasions expressed concerns over the manner in which the EPF operates. In our view the sustainability of a scheme that offers assured returns that are out of line with the market rates is suspect.

We believe that implementation of the aforementioned clause will only further add to investors' woes.

Read views on EPF in July 2004

Another worrisome aspect about EPF is its arbitrary nature. Despite contributions to EPF being mandatory in nature, investors have no choice in terms of the avenues where their monies are invested.

An individual who would like to clock better returns on his savings by taking on a higher degree of risk cannot do so. His contributions are invested in the same instruments as that of a risk-averse investor, i.e. in special deposit schemes with the government and approved bonds.

Effectively a 'one size fits all' approach is used to mange the EPF monies with no regard for the individual's risk profile.

In absence of a strong social security mechanism, the utility of having a scheme like EPF cannot be denied. However, the manner in which it is run does leave a lot to be desired. The scheme needs to be restructured so that it imparts contributors the flexibility to invest in harmony with their risk appetites. Multiple plans with varying combinations of equity-debt allocations could be a feasible solution.

Contributors to the scheme should be given the freedom to choose a plan of their choice; this becomes especially pertinent in view of the scheme's obligatory character.

Another area that needs to be considered is the quality of fund management. The authorities must ensure that investors in EPF have the liberty to choose between multiple fund managers. While some measures have been initiated in these areas, no perceptible change can be seen as yet.

Our advice to investors -- be rational in your expectations from the EPF scheme in its present form and stay informed about any developments on this front. This will help you acquire a more realistic picture of your finances and also aid you in the financial planning process.

Personalfn offers research, guides and tools to assist you in planning your finances better. Over 150,000 users have registered for our services. Now, how about you?