It was also revealed that the Fund's governing law only requires 2.5 percent interest a year to be paid, while the central bank itself has driven inflation as high as 20 percent a year for many years.
Officials also see no need for a recommendation of the International Monetary Fund to have independent management to prevent the public debt office (which is a unit of the Central Bank) and the Treasury from browbeating EPF managers.
In the past, even private debt dealers have complained of coming under pressure from public debt department officials for 'sending rates up' at government securities auctions.
Here are excerpts of an interview Ishara M Gamage had with the Superintendent of EPF D Wasantha and his deputies Kalyani Gunathilake and Ebert Silva as the government prepares to amend the governing law of the fund.
Q: Why has the government decided to amend the 50 year old Employee’s Provident Fund Law? What are the key areas of this amendment and when will it be presented to parliament?
A: Last year we celebrated the 50 year anniversary of the fund. Simultaneous to this silver jubilee, the government decided to amend the fund law. This is 10 years after its last revision.
The amendments are now in the hands of the legal draftsman. So hopefully we can present it to Parliament within the first half of this year. We are going to consider the national identity card number as the EPF member account number.
Then we planned to expand its member services to the informal /self employee sector. At the moment four million of the country's labor force can get formal retirement benefits such as EPF or government pension and other private provident funds.
So we expect another three to four million workers in country's informal and self employment sector would come under this fund.
We also plan to introduce an insurance scheme to members but the scheme is still not finalized.
Then the employers who are employing more than 150 employees can fill their C-03 form (which includes half year updates about employee details) and return through electronic media, either diskette format or e-mail.
Q: Is there any intention to stop the existing EPF housing loan scheme and what is the progress of this scheme during the last 05 years?
A: As an alternative to the existing housing loan scheme we also planned to allow its members to withdraw up to 30 percent of their balances prior to their retirement age, 55.
The housing loan scheme which was introduced in 1986 has given more than 27 billion rupees worth of loans to 209,748 members. During the last 05 years - according the 2007 statistics - 12,969 member balance certificates have been issued to lending institutions for approval of housing loans amounting to 2,872 million rupees.
Meanwhile as a result of the high rate of loans in arrears which is 50 percent by the end of year 2008, nearly 1,078 million rupees were deducted during 2007 from relevant member accounts and remitted to the lending institutions to settle the principal and interest in arrears for the year 2006.
Q: Are there any plans to develop a procedures to make EPF policies public under the new act?
A: Yes. It has been proposed to appoint an investment consultative committee (ICC) representing all stakeholders of the fund to enable stakeholders to express their views on investments and to understand the investment strategies.
Q Is your department satisfied with the overall progress of the fund during the last 50 years and the objective of providing a reasonable retirement benefit to its members?
A: We believe the fund has achieved its objectives in the investment front of providing long-term optimal return to its members while maintaining the stability of the overall fund.
A few of the achievements of the fund between 1977 and 2008 are as follows: Increasing the membership steadily from 1.0 million to 2.3 million; increasing the contributing employers from 23,579 to 64,000 and total number of employers from 51,000 to 170,000; giving members 11.9 per cent average effective rate of return over the last 30 years; increasing member contributions from 305 million rupees to 46,296 million; expanding the net assets from 2.6 billion rupees to 653.2 billion rupees; increasing the refund disbursements from 89 million rupees to 26,824 million rupees.
Q: What is the obligation under the EPF law? To give how much of a return? Compared to what?
The Employees’ Provident Fund was established in 1958 under the EPF Act No.15 of 1958. Under this Act, the Commissioner of Labour has been empowered to enforce the provisions of the Act and the Monetary Board which is the custodian of the monies of the fund (i.e. maintain accounts) to invest funds and pay benefits to members.
The provisions under Section 5(1) and 14(1) of the EPF Act give the powers and duties to the Monetary Board in relation to the maintenance of Accounts of the members and the Fund and investment of such funds.
In terms of Section 5 (1)e of the Act, the Monetary Board may invest the excess funds in securities as the Board may consider fit and may sell such securities.
In terms of Section 14(1), the Monetary Board with the concurrences of the Minister of Labor Relations and Manpower and the Minister of Finance and Planning shall pay an interest rate not less than two and a half per cent per annum out of the investment income of the fund on the amount standing to the credit of the member.
It is not possible to give provisions to compare the return because the return depends on investment strategies and risk-taking.
Q: What is your fund management strategy particularly relating to the real rate of return?
A: The main investment strategy of EPF has been to ensure a long-term safety to the members at a low level of risk, while maintaining a healthy liquidity position.
Accordingly, more than 96 per cent of the investments were placed in government securities and the rest was invested in listed and unlisted high creditworthy corporate debt instruments and stocks. Also 3 billion rupees in the Kerawalapitiya power project. The fund is liable to pay 10 percent tax from the fund income. (State workers pensions are exempt from income tax)
Government securities are the most desirable investments. Since this is a statutory retirement benefit fund, the government is statutorily responsible for the safety of funds. In many countries, pension funds invested in private financial markets have confronted risks and lost money.
Therefore, the rate of interest paid was mainly based on the return on government securities which are the safest investments.
Nominal rate of return declared by the Fund for the last 10 years was in the range of nine per cent to 12.75 per cent and except for the years 2000, 2001 and 2007, the interest rate was higher than the average weighted fixed deposit rate (AWFDR) of banks.
The 5 year average real effective rate of interest was positive and except for 2007, it varied from 0.9 per cent to 3.7 per cent.
The weighted average return earned by the Fund on government securities (which represented 96.5 percent of the total investment portfolio of 2007) was 12 percent in 2007.
The Average Return on Equity Investments was 8.3 percent in 2007.
Q: What kind of yields do you get (at auctions)? Weighted average yield or above, or below the average?
A: The EPF invests its funds with an objective of granting safe returns to the members. This is true with regard to investing in Government Securities as well. Accordingly, taking the weighted average yield of the last auction as an indicative rate we decide the rates to be quoted on EPF investments, since EPF is not a primary dealer to participate in the auction.
: Do you come under pressure to bid low? Do you put bids above weighted average rate? And has anyone stopped you?
A: The EPF functions as any other investor in the market. The investing/trading of government securities is decided purely on the basis of prevailing market information on yield, market liquidity position and the maturing structure of the current investment portfolio.
Depending on the prevailing market conditions and the weighted average yield of the last auction we quote the rates. It may be higher or lower than the weighted average yield. No one has stopped EPF quoting a specific rate. The decision on the bidding rate is taken by the department through a process which is independent, unbiased and transparent.
Q: Is there a formalized procedure to make sure that the conflict of interest between EPF management and Public debt is resolved? If so what is the procedure?
All investment decisions of the fund are taken by the Investment Committee (IC) in the EPF Department appointed by the Monetary Board. The Investment committee consists of relevant Deputy Governor, Assistant Governor, superintendent of EPF, and Additional Superintendent of EPF and the officials in the Fund Management Division. The IC meets daily. All investment decisions are implemented and proposals are informed to the Monetary Bored for approval.
There are necessary firewalls between EPF management and the Public Debt Department with regard to the investments in government securities and therefore, the conflict of interest between two parties would not be a factor to be considered. The EPF is one of the market players in government securities.
Q: Recently International Monetary Fund recommended independent management of the fund. What is the central bank opinion in this regard?
The IMF proposal to restructure the management of the Fund may have been based on the assumption that the management of the Fund is contradicting the overall objective of the CBSL and in turn the Fund will not be able to operate its functions independently.
However, the EPF has been established under the provisions of the EPF Act. It is for the Government to decide the administration and management of the Fund in the interest of the society taking into consideration the circumstances in Sri Lanka.