Economists say the Employees’ Provident Fund (EPF) is a social requirement and is a better option than the government pension scheme that drains out public funds. But the country’s high rate of inflation is depriving millions of private sector working people of its intended benefits.
“The pension systems is a burden on the government budget, so the EPF is much better. But to improve ‘real’ returns from the EPF, macro economic problems, like the rate of inflation, needs to be controlled,” said Dr Sirimal Abeyratne from the Colombo University.
Under government control, the EPF is also open to mismanagement and unproductive investments.
“It is an important source of non-bank financing for the government. So if it is not used productively, it is a loss for the whole country, not just EPF holders,” said Dr Abeyratne.
But economists point out that corruption and mismanagement is not limited to the public sector. “There is corruption and mismanagement in the private sector as well. In most public sector transactions the private sector is involved. So if it is corruption, then the private sector is a partner in corruption. So private management of provident funds is not a solution to the problem of corruption,” said Dr Athula Ranasinghe from the University of Colombo.
Informal sector cut-out
Economists also point out that the EPF coverage is only available to workers in the formal private sector. However, Sri Lanka’s economy is increasingly ‘informalising.’ This means growing numbers of people do not have a social safety net for old age. People are also less able to save for old age because of the high rate of inflation.
“There is a trend of informalisation in the labour market. But the EPF is available only for workers in the formal sector. So we need to look at other mechanisms as well, to be able to extend security to the informal sector,” said Dr Ranasinghe.
Locked on negative returns
Meanwhile, businesses point out that the EPF system does not give a ‘choice’ of investment for workers and employers. Instead, it ‘locks’ funds into a ‘negative returns’ system.
“The returns are negative because the interest rate given by the EPF is below the rate of inflation. Also people don’t have a choice. Everyone has to contribute to the EPF. But younger people may be open to other investment options even at a higher risk, while older people may not do so. But the current system does not allow people to choose how they would like to invest their money,” noted Chandra Jayaratne, a former chairman of the Ceylon Chamber of Commerce.
Businesses say options like health insurance should be built into the EPF system to increase returns to workers and companies.
“The EPF has loan facilities but they are not easy to access because of red tape. But people need funds for medical emergencies. So the EPF should take a more active role in providing health coverage. A small additional contribution can be made by employers and employees and the EPF can tie-up with a health insurance company. The employers’ contribution for health coverage should be exempted from tax,” said Nawaz Rajabdeen, a past president of the Federation of Chambers of Commerce and Industry of Sri Lanka
However, others note that low returns of the EPF are compensated by low risks. “When talking about returns you must also consider the risk factor. In many countries private provident funds are seeing losses because of the current global financial crisis. These funds have invested in high returns but they have not been very secure investments,” says Dr Anura Ekanayake, Vice Chairman of the Ceylon Chamber of Commerce.
Policy mismatch
The Employers Federation of Ceylon (EFC) says the EPF as a social security mechanism is inadequate because of a broader mismatch between the social policy and economic policies in the country.
For instance, the EFC notes that flexible working arrangements are difficult in Sri Lanka.
“People identify very strongly with their work and therefore we need to look at mechanisms that will open opportunities for employers to offer retirees who have the ability to work, with flexible working arrangements. Unfortunately, our labour regulatory framework does not provide for such flexible work arrangements,” said the head of the EFC, Ravi Peiris.
Other flexibilities are also lacking. “Singapore, for example, has introduced different levels of contribution to social security depending on the age of the employee,” said Mr Peiris. The EFC recommends a study on options open to the EPF, to improve returns for workers. |
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