BY Dwaipayan Regmi

The provident fund scheme in Nepal, which has its roots in the Sainik Drabya Kosh (Army Provident Fund) started during the Rana regime, has retained its appeal among salaried individuals. This attraction extends beyond the generous 10% contribution made by employers. It also stems from the enticing tax benefits it offers with eligibility for tax exemption. Whether it is planning for retirement or securing insurance-based benefits, these funds enjoy global popularity, not just within Nepal. Furthermore, it is widely acknowledged that investments in such provident funds typically yield higher returns.

As individuals embark on their professional journey, they naturally seek out avenues for secure financial growth. Provident fund schemes not only develop saving habits but also deliver substantial returns and a myriad of associated benefits. Globally, such funds are considered significant for their role in generating substantial capital which often serves as a contributory fund for governments engaging in internal borrowing. Notably, in Australia, the responsibility for retirement and security provisions for both employers and individuals shifted to the Superannuation Gratuity Charges (SGC) in 1992.

It is no surprise that there are challenges regarding employees' provident funds. These challenges range from insufficient contributions to fluctuating investment returns, compliance and enforcement difficulties, and a general lack of financial literacy. Adapting to the changing employment landscape and technological integration adds to the complexity. However, optimising investment patterns is crucial in navigating these challenges. The introduction of the Social Security Fund in Nepal has introduced another dimension to provident fund schemes, creating considerable ambiguity.

While some organisations have their own provident fund schemes, none have matched the national-level provident fund in terms of benefits and reliability. Various provident fund schemes exist today, with the Employee Provident Fund being the oldest and largest and the recently established Social Security Fund being another.

There is a prevailing notion that having money at hand is better than having it in the future. This is one of the reasons why some people are hesitant to participate in such schemes. Notably, countries like The Netherlands, Denmark, and Israel have one of the best pension systems in the world. Iceland's pension scheme, hailed worldwide, is a model that developing nations could learn from. It ensures that every Icelandic citizen, regardless of their status, is eligible to participate. This scheme is primarily tax-financed and covers basic provisions equivalent to around 15% of average earnings. With its three pillars, including a tax-financed public pension scheme, a voluntary private pension system, and compulsory participation, Iceland's pension scheme stands out for its attractiveness. The focus on portability and flexibility benefits all its members.

The provident fund-based schemes offered by developing economies should progress to more advanced phases. They should begin by prioritising flexibility, allowing participants to contribute more than the compulsory amount which enables them to save more for their future. These schemes should also Identify high-profit investment opportunities. Instead of merely focusing on safe investments, such funds should explore options with higher returns, whether they are foreign bonds or investments within the local economy, so that the participants get more benefits. It is also crucial to enhance financial literacy among participants. Additionally, participants in these schemes should be granted certain privileges. They should be eligible for interest rate leverages at banks or or apply for shares.

The impact of these funds on the economy is the next major concern. The role that they play in capital formation cannot be overlooked. Both employees and employers contribute to these funds, resulting in substantial accumulated capital. This capital can be invested in various schemes that mobilise savings, ultimately boosting the nation's domestic funds and bringing more benefits for participants. These funds can be allocated to infrastructure projects and other development initiatives, creating job opportunities, enhancing productivity, and promoting economic development.

Moreover, when these funds function as major institutional investors in the financial market, they contribute to market stability. As institutional investors prepare long-term investment strategies, this helps investors weather short-term market fluctuations and reduce volatility.

Provident fund schemes have had a positive impact on productivity and job satisfaction. They offer diverse schemes and provide financial security, promoting peace of mind among employees. This, in turn, fosters increased job satisfaction, loyalty, and higher workplace productivity, ultimately contributing to economic growth. Additionally, these schemes encourage individuals to save for their retirement, reducing their dependence on the government during their old age and alleviating the social security burden on the economy.

The provident fund schemes have huge scope and impact, and they are already functioning effectively. However, a small push can further enhance their effectiveness and contribute to increased productivity. 

(Regmi is a deputy manager at Rastriya Banijya Bank Ltd)