The Government, in another disturbing move though less controversial than the Pension Bill, has directed all private provident funds sector to invest 40% of its funds in state banks or Treasury Bills in a move to minimize investment risks and protect member contributions in these funds.
The move has triggered concerns among private sector workers and employers. The Inland Revenue (IRD) Commissioner General acting under the Inland Revenue Act issued a gazette notification dated May 6 in which it also said 20 % of the funds should be invested in the stock market or commercial banks.
Commissioner - Private Provident Fund at the Labour Department, U.P.R. Sirinaga told the Business Times that a directive to invest 40% of these funds in state banks had been issued for the first time. Earlier all their investments were made in government securities including Treasury bills, government bonds and equity etc. Up to now these funds are being properly managed and there has been no complaints of misuse or financial misappropriation, he added.
Currently there are 172 such funds with a total worth of Rs. 210 billion in assets and about 150,000 members.
The gazette says contributions made by the employer to funds like the provident funds, savings fund, pensions fund, trust fund or any other fund, should not exceed 25% of the employers annual wage bill. Also, 40% of the monies invested from these funds have to be deposited in the Bank of Ceylon, People’s Bank, National Savings Bank or Treasury Bills. Less than 20% of the monies from the funds should be invested in the stock market or in commercial banks.
A senior Finance Ministry official said private sector funds are considered as trust funds, and directors of private companies have a responsibility in investing it in a risk-free manner. If they misuse these funds then it amounts to breach of trust and it is a criminal offence, he said. Investing in government securities including Treasury Bills is the safest and risk free investment and its returns are guaranteed, he added.
UNP MP Eran Wickramaratne, a former CEO at NDB Bank, said the IRD cannot issue directions like this and function as a regulator.
There has been no known previous case of mismanagement of these funds, he said adding however that the government was intervening for two reasons. First the Government is desperate to fund itself as its debt is mounting. “It funds itself directly through Treasury instruments or funds Government banks that are carrying huge debts of Government,” he said. Secondly the Government has been taking control of private sector banks and not only using EPF but also the Bank of Ceylon and NSB. “So this regulation ensures another source of funds for these banks. If the safety of private provident fund is a focus of this regulation then the Government must strengthen the capital adequately for Government banks,” he added.
Several heads of leading private firms expressed doubts to the Business Times about the safety of investing savings, pensions and trust funds in state banks. Employees in some private firms like JKH, Hayleys and Richard Pieris, all commercial banks, Unilevers, Sri Lanka Telecom and Mercantile Sector Provident Fund Society (MSPFS), contribute to a private pension fund managed by the company, or by a fund management company.
They expressed concern over the government directive citing issues like state interference and heavy dependence of government borrowing from state banks, weakness among state commercial banks, limited risk management among banks and lack of a debt recovey framework.
Averell Goonetilleke, CEO of the MSPFS managing the country’s oldest provident fund (even before the EPF was created) with over 15,000 members in 66 companies, said that their money has been invested in Treasury bills, bonds and commercial banks with a Fitch rating of ‘A’ and above. The Chamber of Commerce is the trustee of their Fund and the auditors are Ernst & Young. They have to ensure that the monies of members are safe, he said. The Society paid an interest of 21% to its members last year and plans to pay 18 % this year, much higher than the EPF which paid 13.7 % interest to its members last year.
Last year the government planned to bring dozens of superannuation (private and provident) funds, currently registered with the Commissioner of Labour, under the supervision and regulation of the Insurance Board of Sri Lanka. But that didn’t materialise due to protests from private sector firms, employers said.
However the Finance Ministry official said the latest plan is designed to better regulate these funds while paving the way for some of it to be invested in the capital market, “Although these funds are regulated by the Labour Commissioner, the supervision does not include prudential rules and guidelines. The absence of a regulatory and supervisory system for private superannuation funds has bedn identified as one of the gaps in the regulation of the financial system,” he said.