Criticism about the handling of the Employees Provident Fund (EPF) and concerns raised about the rate of return and investment of the Rs.560 billion (as at 2007) Fund was rebuffed by the Central Bank's (CB) Superintendent of EPF, Mr. D. Wasantha.
In an interview with The Sunday Times FT, Mr. Wasantha and other officials from the EPF department said the rate of return which is 11.2% as of 2007 is 'reasonable' for a large long term fund. "We focus on long term investments so people cannot expect short term high returns," he said.
Around 95% of the Fund is invested in government securities while the rest is invested in the stock market, the private sector and debentures. The reason for investing in government bonds is to ensure the safety of the Fund which is the biggest concern for the EPF department. "The government won't default and has the capacity to repay," Mr. Wasantha said. "That is the basic idea behind our investment policy."
The 11.2% interest rate is not for a specific year, Mr. Wasantha explained. It is the accumulated rate of return from investments over the past 25 years. "It is not the rate prevailing in that particular year. It is augmented by past investments and past returns," he said. "That's the key point that most people don't understand." Instead, the EPF should be compared with other long term fund returns and long term instruments. Risk and duration must be taken into consideration.
History
The EPF was started in 1958 to safeguard private sector employees. Pension schemes were available for government employees during that period but private sector employees were left out, prompting the need to create the Fund. Mr. Wasantha said unions at that time were very powerful and there was a great amount of pressure to establish a social security scheme. Unlike today where the economy is private sector driven, the government in 1958 had all the power and controlled almost all sectors. "The ultimate purpose of the government was to protect workers when they become feeble and are in no position to work."
The EPF Act came into effect which made it law that private sector employers contribute to the Fund. "Otherwise, it would have just been a request," Mr. Wasantha said. "The government merely requesting the private sector would not have been sufficient." In 1958, the private sector rates for EPF were 6% from employers and 4% from employees. Today, this has increased to 12% from employers and 8% from employees, double from when it started.
Investments
Even though other countries in the region such as Singapore and Malaysia also created similar Fund's during the time the EPF was enacted here, the countries shouldn't be compared because a place like Singapore is a developed capital market with good instruments to invest. According to Mr. Wasantha, the capital markets in Sri Lanka are not so developed and there are far less investment opportunities with a certain level of safety. In the stock market, there are only a few good companies that can be invested in and with the recent downturn in the markets, it was pointed out that the Fund would have had to bear greater losses if it invested heavily in the stock market. However, Sri Lanka's administrative costs which are less than 1% are lower than those of Singapore of Malaysia whose administrative costs exceed 3%.
Mr. Wasantha said the EPF has a proper evaluation process where any investment in the private sector in shares or debentures or even government securities is authorized by the investment committee. "There is a transparent scheme of approving investments and we also have to inform the Monetary Board and get their approval."
If market interest rates go up, EPF rates are lower and vice versa. In 2002, the market rate was 8 or 9% while the EPF rate was 12.5%. There have been only three instances over the past decade when bank rates have been higher than EPF rates.
For a year, the government issues bonds and bills around Rs.150 billion to Rs.183 billion. Other players in the market such as the Bank of Ceylon and People's Bank also invest in government papers.
He added that the Fund has invested in the Kerawalapitiya Power Plant which he considers to be a very productive investment. The plant is 300MW in capacity and generates 12% of electricity consumption in the country.
Inactive Accounts
A staggering nine million EPF accounts are considered active out of a total of 11 million accounts. The most common reason behind the inactive accounts is when individuals move from job to job, the accounts are not amalgamated. One person could have as much as five accounts. The latest one is active and the others are treated as inactive.
The current system is an employer centric registration system which the EPF Department is in the process of rectifying. As it stands, employers assign EPF numbers to their employees, something which was continued from when the Fund was created due to the fact that employees back then did not have proper NIC's or other problems. Mr. Wasantha said some companies had their own private provident funds but the government has passed regulations, making them illegal.
He added that in order to tackle the vast number of inactive accounts, the first of two approaches is to amalgamate them. A division is in place in the CB to handle this. Employees have to write to the CB through the Labour Department (in charge of the administration of the Fund) about making arrangements to amalgamate their accounts.
The second approach is the re-registration of the accounts by using the NIC numbers. Mr. Wasantha said three components of re-registering the accounts are data collection where information will be collected from the companies, data entry and data verification, the most important aspect of the process. He said that the Department expects to complete the re-registration process by the end of 2009. He added that it will be time consuming and costly which requires a lot of manpower.
Other inactive accounts can be attributed to those who have deceased to which the CB remains unaware. However, the heirs can claim the money and the CB will release the funds once instructed by the Labour Commissioner.
Investing in Bonds
The recent announcement by the CB that people who withdraw from their accounts and re-invest in Treasury Bills with an additional rate of interest in not at all due to the government needing additional funds. Mr. Wasantha explained that the proposal came from the Governor during the wake of the Sakvithi scandal and to protect beneficiaries who don't invest their funds properly due to a lack of knowledge and instead go for short term high rates.
With this new scheme, senior citizens can invest their total sum of part of their benefits in treasury bonds and those investors will be given interest of 10% above the prevailing market rate. For example if the market rate is 10%, these investors will be given 1% extra. If the market rate is 15%, they will be given 1.5% extra and so on. "The reason is to protect senior citizens from being cheated from Sakvithi type schemes and it is voluntary."
When asked about the criticism that public money is being spent unproductively by the government, Mr. Wasantha said he cannot comment on what the government does. "We are investing in government papers and it is up to the government to invest that money in something productive as long as we get our returns. The government is providing public goods such as health, education, defense and peace which is a public good. Through the
budget, they finance those public goods," he said. The government comes to the EPF, ETF, commercial banks and foreign countries to get money but they make their own decisions.
Issues of concern
Mr. Wasantha said there is pressure from workers and unions to withdraw funds prior to retirement with some proposals asking to allow withdrawing 10% or 30% of funds for education and health. "We should not encourage workers to use this money to finance current expenditures," he said. The EPF is a retirement benefit with the exception of being used for housing because it is an investment.
However, he said there is concern that the EPF's housing loan scheme has been a failure to its members due to a 40% default rate. Under the scheme, banks keep the fund balance as a guarantee and if there is a default, they ask for the funds to be release by the EPF. However, Mr. Wasantha warned that once the balance decreases, it affects the account holder in the long run. Also, banks encourage members not to repay because it is easier for them to get the money from the EPF accounts.
|
E-mail