Govt’s move to bring EPF/ ETF under the Treasury: Stiff test for Contributory pension scheme | Sunday Observer

Govt’s move to bring EPF/ ETF under the Treasury: Stiff test for Contributory pension scheme

The Employees’ Provident Fund (EPF) and the Employees’ Trust Fund, (ETF) whether under one, or two institutions have to be managed professionally, by competent people, with integrity and commitment to provide a better return to the funds of the poor man’s hard earned money, said financial analysts and senior bankers, with regard to the move by the government to bring the EPF and the ETF under the Treasury.

Labour Minister, W.D.J. Seneviratne said, plans are afoot to set up a private sector pension fund by placing the EPF and ETF under the Treasury.

He said, the objective of the move is to formulate a contributory pension scheme, such as the one mooted for public sector employees. Analysts said, the EPF was brought under the management of the Central Bank, and the ETF under the Employees’ Trust Fund Board with a purpose, and what good it would bring to the two Funds by shifting hands, is a moot point. They opined that it is the contributors to the Funds who have the right to decide the investment of the funds, based on their risk appetite.

Accountability

At this hour, it is vital to put the Fund management procedures properly and hold those managing it accountable. Proper investment policies should be in place and the performance of the Funds measured, based on yardsticks, the analysts pointed out. The EPF was invested in equity after 2007, resulting in staggering losses incurred by the Fund, since there was no proper evaluation method. Prior to 1984 all organizations had their private pension funds. Legislation was moved thereafter, prohibiting private provident funds. Thereby, all contributions had to go to the EPF. Today, private sector employees are left only with the EPF and ETF.

“There should be an investment and trading portfolio to make more money. The EPF should be under the Central Bank and managed by those who should be accountable and their performance evaluated daily”, financial analysts said.

They said: “Those who manage the funds are trustees. Very often the EPF becomes the scapegoat of others to make money. There should be independent and competent people to manage the Funds according to the risk appetite of the contributors, in what proportion, and where, they want their funds to be invested. Contributors should be allowed to decide whether the funds should be invested in equity, corporate debt or government securities”.

The Sunday Observer spoke to a cross section of financial analysts and professionals, on the move to bring the two Funds under the Treasury, and here’s what they say:

National Chamber of Commerce of Sri Lanka former President and Employees’ Trust Fund Board former Chairman Sunil Wijesinha said: “The move to bring the EPF and ETF under the Treasury is good, but it needs to be managed in a transparent manner and its investments in the Stock Market has to bring higher returns.

Objectives

“What many do not understand is, that the two Funds were set up with two different objectives. The EPF is a superannuation scheme which provides a lump sum amount to employees at retirement. The ETF is meant to promote economic democracy, and assist employees during their employment life, and not at retirement. The ETF was set up to ensure that everyone is linked to the economy.

“The Funds should be monitored separately, but under one institution. The board should comprise ex-officio members, such as, the Commissioner of Labour, the Employers’ Federation Chairman, and men who are knowledgeable in human resource development and experts in finance.”

Former Ceylon Chamber of Commerce Chairman, Chandra Jayaratne said: “While there are certain benefits in bringing the two institutions together under one institution, there are disadvantages which should be carefully looked into, to ensure the Funds are safe and bring the due returns to the people.

“The number of EPF contributors is higher than that of ETF. By bringing the two Funds under one institution those who do not contribute to the ETF will have to contribute to the Fund. The other benefit is, by bringing the tow under one institution, there will be a significant reduction in administration, accounting and oversight costs.

“The downside of the move is, that it all depends on the integrity, capability and values that drive those who manage the Funds. We need to ensure there is good governance in the Fund management. When they are under two institutions there is better oversight with more attention. Under one body, such attention may not be there.”

Candor Group of Companies Director/CEO, Ravi Abeysuriya said:

“The concern of many workers is, how safe their EPF and ETF contributions would be, by the time they retire, and in addition, the real value of their balance that will be available to use as retirement income. What is imperative is, having a proper governance structure of the Board composition, and how the Board members are appointed. These have a significant impact on the performance of the investments made by provident funds, such as, EPF/ETF.

“Funds whose boards have high fractions of members, who either sit on the board by virtue of their position in the government or Central Bank, (ex officio) or were appointed by a state official, under-perform the most, followed by Funds whose boards have a high fraction of members elected by participants. Political patronage contributes to poor performance of boards heavily populated by officials appointed by the Government or by the Central Bank.

Management

“The lack of investment management experience contributes to poor performance by boards with high fractions of participant elected members. Establishing a successful governance structure depends on establishing proper ethics, governance structure at EPF/ETF and skills and professional experience of fund management of board members. Hence, it is prudent to have a fine balance of Employees, Employers and government representatives, and people with a minimum of 10 years professional Fund management experience with a flawless track record of ethics and integrity.

“What everybody needs to understand is, Sri Lanka is sitting on a ticking time bomb, because we have the fastest ageing population in South Asia, and the share of elderly population over 60 years is expected to increase from 12.5 percent to 16.7 percent in 2021. By 2041, one out of every four is expected to be an elderly person. Sri Lanka is almost unique, as we have made our demographic transition well before making the economic transition, in stark contrast to many other countries which have either made those shifts in concert, or in a much balanced manner. Given the gravity of the issue, ageing population could be considered the single most serious socio-economic issue faced by policy makers in Sri Lanka at this juncture, and probably in the future”.

JB Securities (Pvt) Ltd., Managing Director Murtaza. Jafferjee said:

“The EPF and ETF should be under an independent superannuation authority. This plan was mooted in 2003.

“The EPF was a pension fund, the ETF had a slightly different objective – it was supposed to be capital fund to develop the private sector. Placing the EPF and ETF under the Ministry of Finance creates a huge conflict for these two funds whose primary objective is it to improve returns on a risk adjusted basis.

The primary objective of the Ministry of Finance is to increase revenues to fund government expenditure and borrow from markets to service its debt”. The EPF, the largest social security scheme in the country, recorded assets of around Rs.1, 665 billion at the end of 2015 and the ETF around Rs. 218.5 billion with around 2.5 million members, currently managed by the National Policies and Economic Affairs Ministry.

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