New Delhi: The Employees’ Provident Fund Organisation (EPFO), India’s retirement fund manager, has cut the interest rate it pays to more than 50 million subscribers to 8.55% for the year to 31 March, the lowest in five years.

The labour ministry-controlled retirement fund manager had paid 8.65% the previous year.

The cut, announced after a meeting of the central board of trustees (CBT) on Wednesday, was the best the body could offer in the “current uncertain" market conditions, labour secretary M. Sathiyavathy said.

The decision could prove politically problematic for the Bharatiya Janata Party-led government as it may anger the vocal middle class, a point that employee representatives on the EPFO board told central government representatives at the retirement fund body.

Labour minister Santosh Kumar Gangwar, who heads the body’s central board, said that the interest rate payout was cut because of low returns from debt investments. Although the pension fund manager realized more than Rs1,000 crore in capital gains by selling off a part of its equity exposure, the earnings were not enough to offer a higher interest rate or even match that of the previous year.

“Last year, after we paid an interest rate of 8.65%, EPFO had a surplus of Rs695 crore and this year, after we reached a rate of 8.55%, the surplus was Rs586 crore," Gangwar said, indicating that strained finances were the reason behind a lower payout. Debt investments earned EPFO less than 8% return in the current fiscal, he said.

When asked why EPFO needs to maintain a surplus worth Rs600 crore, EPFO financial adviser Manish Gupta said pension funds “across the globe need to maintain a health-stabilizing fund".

However, employee representatives said that as per earning estimates, an 8.65% interest payout would have still left a surplus of Rs48.42 crore.

“When government does not contribute to the PF of subscribers, then why are they reducing the interest rate despite money in their corpus?" asked A.K. Padmanabhan, president of the Centre of Indian Trade Unions, a central trade union affiliated to the CPI(M), and a member of the CBT.

Ashok Singh, a senior leader of the Indian National Trade Union Congress and CBT member, said that when EPFO went to the stock market, the argument was that it would enhance returns for PF subscribers. But two-and-a-half years on, they have been constantly reducing the rate, he said. “You will see the employees’ reaction on the ground soon. The government is taking away all options of better earnings for the common man," said Singh.

The CBT decision will need to be approved by the finance ministry.

Currently, EPFO invests 15% of its annual accruals in equities via exchange-traded funds and the remaining 85% in debt instruments, including government bonds, private sector bonds and fixed deposits. Since August 2015, when it entered the stock market, the body has invested a little over Rs44,000 crore. As of January-end, its equity investments have earned around 16% returns.

Gangwar said that the government seeks to offer maximum benefit to employees. He said that the EPF rate is higher than the Government Provident Fund and Public Provident Fund, which are earning 7.6% interest this quarter.

The minister said that the CBT has decided to amend the EPF Act to add more companies under EPFO and increase social security benefits. Right now, all organized sector establishments and firms deploying 20 or more employees come under EPFO. The minister said the ceiling has been reduced to 10 now.

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