When should companies recoup pension fund losses?

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Exempted employers have to make good on payment defaults by issuers only in the event of a shortfall in interest payout, argue Hitesh Jain and Paras Parekh

The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act), envisages provident funds for employees in factories and other establishments. Under the scheme, the employee and employer each contribute towards employees’ provident fund. These funds are managed by a Central Board of Trustees assisted by the Employees Provident Fund Organisation (EPFO), a regulatory body. This is a statutory requirement in India aimed at ensuring that employees are provided with benefits in addition to their wages with contributions by the employer.

Paras Parekh

However, various organizations are granted exemption from registering with the EPFO and can constitute a board of trustees for managing the provident fund. Such “exempted establishments” are required to comply with conditions specified under the Employees’ Provident Funds Scheme, 1952 (EPF Scheme), and exemption orders issued by the EPFO (conditions). These provident funds also invest in debt instruments issued by reputed companies – generally with higher credit ratings.

Trusts of provident funds (pension funds in certain jurisdictions) of exempted establishments in India are faced with a spate of defaults by issuer companies on payments on debt instruments.

The conditions require the employer to, in certain cases, make good on losses by the provident fund. These include a requirement upon the employer to meet a shortfall in the rate of interest prescribed by the government to be paid to employees. Other conditions envisage making good on losses in circumstances such as theft, burglary, defalcation, misappropriation, fraud, wrong investment decisions and any other reason.

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Paras Parekh and Hitesh Jain are partners at Parinam Law Associates.

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