The 'pension plan' comes at as time when the state already takes away 20 percent of a private sector workers' salary into state managed pension funds, whose management has come under increasing fire in recent years.

The new bill to create another forced savings fund by taking away 4 percent of private sector salaries has been labelled as an attempt by the state to further plunder private sector worker's earnings.

The bill to cut salaries to build a forced savings scheme was hatched in secret and came arbitrarily without consultation from the people who will lose their money.

It has been perceived as a new deficit financing tool at time when the existing private sector retirement fund, which is the key deficit financing tool for the state, may face net withdrawals in the next few years due to a rapidly ageing population.

Jayaratne is a professional who has extensive knowledge of how long term finance works, having headed an insurance firm.

The full text of the letter is as follows.

22nd April 2011.

His Excellency Mahinda Rajapaksa,
The President and Minister of Finance & Planning,
Temple Trees,
Colombo 3.

Your Excellency,
A Public Interest Critique on the Bill to Establish an Employees’ Pension Benefits Fund

Having received today, a copy of the Bill to Establish an Employees’ Pension Benefits Fund, I hasten to address you in the above regard by this open letter, as I understand that the relevant bill inter alia is to be debated in Parliament and adopted on the 27th April 2011 and made effective from the May Day 2011.

In the interest of all stakeholders of the proposed bill, (including but not limited to, the Government, Employees, Employers, Labour Unions, Chambers of Commerce/Employers Federations, Foreign and Local Investors, Multi-lateral Agencies and the Society at Large,) I appeal to Your Excellency not to proceed with the enactment of the above bill, until such time as the following issues have been adequately clarified and following an open and transparent intellectual debate involving all relevant stakeholders all such participants agree that the enactment of the bill in its current form is in the longer term interests of all stakeholders, the country and its people:

1. Ignoring the pronouncements previously made during the last budget, policy pronouncements and as stated by the leaders in governance hitherto, Your Excellency reiterate again the rationale and the objectives of the enactment of the bill in its current form.

2. Present the cost benefits accruing to the covered employees, employers as well as the socio-economic benefits accruing to the nation and its people in the longer term.

3. Present the differences between the currently proposed pension benefits scheme and its proposed operations, management, sustainability and control, over the many similar proposals of previous governments that were duly subjected to open public intellectual debate and abandoned due to being deemed as unviable and unjustified in respect of the sustainable cost benefits to employers, employees and the state.

4. Present all reports of competent professionals engaged by the Ministry of Finance & Planning, associated Ministries and Regulatory Agencies in the process of designing the pension benefits scheme, setting out economic/financial and actuarial assessments of the viability, desirability and longer term sustainability of the proposed scheme under different sets of assumptions

5. Clarify whether following actuarial assessments carried out by independent competent professionals, the pension benefit scheme and all products and services offered under the proposed scheme have been certified as viable, sustainable and meeting the long term benefit expectations of the covered employees and employers and the state.

6. Present all reports of competent professionals engaged by the Ministry of Finance & Planning, associated Ministries and Regulatory Agencies in the process of designing the pension benefits scheme, setting out long term impact assessments, sensitivity analysis, stress tests and risk analysis as impacting on employers, employees and the state, consequent to enactment of the bill

7. Clarify whether the reports referred to in 5 and 6 above have identified and embedded risk mitigation strategies to be adopted to safeguard the longer term interests of the employers, employees, and the state, especially in regard to the long term

a. Inflation risks
b. Differences in inflation and expected interest yields
c. Changes in mortality and morbidity risks and empirical life cycle age effects
d. Investment risks
e. Aggregation risks in respect of claims and investments
f. Reserve mismatch risks
g. Catastrophic risks
h. Other market risks

8. Clarify whether the Ministry of Finance & Planning, associated Ministries and Regulatory Agencies and independent professionals engaged have reviewed international experiences, case studies and international best practices and have embedded in the process of designing the pension benefits scheme all lessons learnt and linked strategies and risk mitigation action plans within the design and operations/management of the scheme.

9. Clarify whether all submissions made by Chambers of Commerce, Employers Federations, Trade Unions, Professional Bodies, Academics, Civil Society Organization and Multi-lateral Agencies in regard to the proposed bill and the pensions benefit scheme have been adequately considered and duly resolved all challenges, fears and risks pointed out in such submissions.

10. If the proposed bill was challenged before the Supreme Court on its constitutionality, clarify that all such objections have been duly addressed or will be addressed by amendments moved during committee stage debate of the bill in parliament.

11. Present the likely long term impact on the expected maturity values from the perspective of the retiring employees in terms of their statutory dues under the ETF scheme, consequent to ten per centum of the annual earnings of the Employees’ Trust Fund being transferred to the new pension benefits fund

12. Present the likely long term impact on the expected maturity values from the perspective of the retiring employees in respect of their statutory dues as gratuity entitlements, consequent to ten per centum of the gratuity dues at retirement being transferred to the new pension benefits fund

13. Present the likely long term impact on the expected maturity values from the perspective of the retiring employees in respect of their present statutory gratuity dues at retirement, consequent to the earned gratuity entitlements annually being transferred to the new pension benefits fund, having taken cognizance of the benefits the employees currently enjoys in the final salary at retirement being applied in respect of the full period of service from the inception of employment to the date of retirement in the determination of the gratuity entitlement.

14. Clarify the long term impact on the employees consequent to the annual interest guarantees in terms of clause 16 of the Act being fixed at 2.5% per annum, whereas funds currently in EPF and ETF, if they had remained in those funds would have been subject to higher minimum guaranteed returns.

15. Present the likely long term impact on the expected maturity values from the perspective of the retiring employees in respect of their expected EPF withdrawals at retirement, consequent to two per centum of the earnings lying to the credit of a provident fund upon such fund becoming payable to an employee at retirement, being transferred to the new pension benefits fund, having given recognition to the likely prior withdrawals made by employees for housing and medical contingencies

16. Present the likely long term impact on the employers in terms of cash flows consequent additional payment on account of pension benefits fund, and annual payment of the earned gratuity of employees to the pension benefits fund

17. Present the likely long term impact on the employers in terms of cash flows consequent additional payment on account of pension benefits fund having to be paid even where employers contribute to provident funds of employees in excess of the minimum statutory rates in context of the Act prohibiting employers from reducing any of the earnings of employees consequent to the enactment of the bill

18. Present the likely long term impact on the employers in terms of cash flows consequent to the payment on account of gratuity annually to the pension benefits fund, whilst having presently committed to gratuity payments to employees at retirement in excess of the minimum statutory limits,(ie. especially, in respect of long service employees related gratuity commitments in excess of the minimum statutory prescribed amounts)

19. Confirm that even consequent to the transfer of the money lying in inactive accounts of members of the EPF, where such members have passed seventy years of age that any future claims made by such employees, or their heirs and/or their estates will be honoured and met out of the consolidated find.

20. Clarify the risk mitigation strategies embedded in the legal and operating frame work of the proposed scheme to prevent policy capture corruption risks by the discretions left to be exercised by the Minister, Monetary Board and other officials, (ie. with specific reference to sections section 48 (2) (especially 48(2) (d) ) and section 49 definition relating to covered employees).

21. Clarify specifically how the funds contributed to by and on behalf of an employee who does not complete ten years in the scheme along with the appropriate share of investment income will be dealt with under the proposed scheme

22. Clarify whether there are any permitted opportunities for employees at their absolute discretion in opting voluntarily out of the proposed scheme, with such employees continuing to be subject to the current scheme of ETF/EPF and gratuity structure, with employers increasing their contribution to EPF by 2% of gross salary.

23. Clarify the definition of “Gross Salary” referred to in sections 12 and 13 in relation to the interpretations section under 49 making reference to ‘earnings’ including cash value of free meals etc

24. Clarify the potential impact on business entities in distress, those subject to turn around and restructure and those that have become unviable, in relation to the application of section 18 of the Act relating to delayed settlement of company contributions and accelerated regular monthly/annual cash flow commitments on account of gratuity, at an earlier time than before .

25. Validation and certification that employees covered under the pension benefits categorized and segmented as falling in to different sets of assumptions, incrementally benefit and are not negatively impacted by the transfer of benefits received hitherto as EPF, ETF and Gratuity vs the package of benefits receivable under the above scheme as now proposed, including in respect of

a. Those with a few years to retirement
b. Those retiring before 60 years
c. Those employees who will be unfortunate to die early after retirement

26. Confirmation that pensions under the proposed scheme will be payable for life of an employee and that such payments and commitments made by the fund and the pension scheme carry an implicit government guarantee.

27. Confirmation that the pension benefits of employees covered under section 12 will also be computed based on last drawn salary ate retirement, despite not being so specified in section 25(1)

28. Clarification of the entitlements of benefits of the family members of a deceased members of the scheme, specifically in relation to the spouse, children and other heirs other than those specified in section 26

29. Clarification as to how the balance 40% to the credit of a deceased member’s account will be dealt with in terms of section 26 of the Act

30. Confirmation whether the members of the scheme in receipt of annual increases in salary in excess of 6.5% over the preceding year will yet continue to be liable to contribute their share to the pension benefit fund along with the employer in terms of such increased salary, despite in the determination of the maximum salary in receiving pensions in terms of section 25 through the computed final salary is limited to an increase at the rate of the said 6.5% only and validate that this stipulation is not unjust in respect of such employees

31. Constitutional and moral validation of the acceptability of the provisions of section 40(3) where a certificate issued by the Commissioner cannot be called in to question or examined by the Court in any court proceedings

32. Confirmation that no withholding taxes will apply in respect of all returns and investment incomes derived from securities and investments of the pension benefits fund, including securities invested via the secondary market.

33. Confirmation that all pension receipts in the hands of the recipients will remain tax free and / or if at all such receipts above stipulated limits will be taxed at the applicable tax rates determined having actuarially ascertained the respective components of capital return and investment yield of the pension receipt and only the latter being subject to tax

34. Confirmation that that investments of the pension fund assets will be made by an independent set of Trustees or an independent Board of Investment Mangers ,who will not be subject to Treasury/Monetary Board/Labour Department or such other executive originated directed investment instructions or control.

35. Confirmation that all investments and investment management framework will be subject to a transparent code of ethics and international best practices of governance and will ensure that conflicts of interests are avoided and investments made only where transparent justification can be made demonstrating that the interests of the members in the longer term and the stability and solvency of the fund were the sole criteria of the investment decisions.

36. Confirmation that all investments of the fund will be managed as a passive investment portfolio and not used in exercising voting rights to direct and control the investee organizations

37. Confirm that the fund and its operations and fund investments/management will be subject to annual ad half yearly review, audit and report by independent professional actuaries

38. Actuarial certifications in terms of 37 above, including the certification of solvency, going concern status and ability of the fund to meet all future liabilities and contingencies, and en is endowed with adequacy of requisite reserves and provisions and risk management frameworks, will be published annually.

39. Confirmation that the Auditor General appointed to audit the accounts of the fund will have adequate resources, knowledge, capability and systems to effectively carry out the audit and that the fund administrators will have adequate resources, knowledge, capability and systems to effectively carry out fund administration accountability

40. Confirmation that processes are in place to ensure that only ‘fit and proper persons’, of age not exceeding 65 years and not subject to any criminal charges or charges in the nature of moral turpitude are appointed as key officers, directors and senior staff of the Fund

I reiterate that the requests made herein before be given effect to by Your Excellency, prior to enactment of the above bill. Otherwise, it may be perceived by stakeholders of society that the scheme as planned is not for the effective long term benefit of the employees nor in the interest of the employers and society at large.

They may conceive that the scheme has been designed in a manner to meet other motives of the government and to leverage a pool of captive investments with which the government may control the securities markets and derive benefits of lower interest costs to government which will further enable the government to use funds generated to control private sector establishments through market mechanisms. If so perceived the proposed scheme will tantamount to a practice akin to policy capture corruption.

Yours Sincerely,

Chandra Jayaratne

cc. Hon. Minister of Labour
Secretary to the President,
Secretary Ministry of Finance & Planning,
Secretary Ministry of Labour,
Secretary, Monetary Board,
Deputy Governor, Central Bank,
Commissioner of Labor
Commissioner General of Inland Revenue
Country Director, International Monetary Fund
Country Director, World Bank,
Country Director, Asian Development Bank,
Country Director, International Labour Organization
Chairman, Ceylon Chamber of Commerce,
Chairman, Employers Federation of Ceylon,
Editors of Financial Media – For Publication
Executive Director, Transparency International Sri Lanka
Executive Director, Institute of Policy Studies
President, Organization of Professional Associations,
President, Bar Association of Sri Lanka,
President, Economic Association of Sri Lanka
President, Institute of Chartered Accountants of Sri Lanka
President, Institute of Directors
President, Chartered Financial Analysts