Commenting on the current state of retirement funding in Sri Lanka at a recently held forum, Dr. de Silva expressed concern over the ability of the country to adequately fund its pensioners, particularly in the backdrop of an aging population, which may translate to the government of the time having to shoulder a debt burden of up to 90% of GDP stemming from pension payments to the Civil Service Pension Scheme alone.
One in four people in Sri Lanka are estimated to be over the age of 60 by the year 2040.
“At the bottom of this problem is the conflict of interest that exists as a result of the Central Bank managing the investments of the EPF supposedly to secure the best returns for the fund, whilst also looking to provide the government with a cheap source of funding. Management of the EPF must be taken out of the hands of the Central Bank in order to resolve this conflict, Dr de Silva added.
At present, approximately 95% of the EPF is invested into government treasury bills and bonds, with the remaining 5% being invested into equities. Whilst the investments of the EPF do not directly appear on the government’s budget sheet, though such investments go into government securities, the EPF acts as a de facto lender to the government.
“As long as there is a budget deficit, the EPF will remain a convenient source of cheap funding for the government and that is the simple truth.” CEO, NDB Aviva Wealth Management, Prabodha Samarasekera pointed out.
Besides the potential conflict of interest that exists as a result of the EPF acting as a lender to the government on the direction of the Central Bank, despite the availability of better returns through a more diversified portfolio, the management of the EPF’s investments in the Colombo Stock Exchange have also been a serious source of concern, as evidenced by the recent Trade Union legal action against the peculiar investment choices made by the fund.
A group of 11 trade unions filed fundamental rights petitions with the Supreme Court against investments made by the EPF into loss making enterprises. The unions are seeking an order from the Court directing the respondents to invest only in blue chip companies after implementing a consultation procedure with employees of trade unions and giving a full disclosure of the details of investments made.
The EPF is the second largest shareholder in Galadari Hotels (Lanka) PlC with a 13% stake as at 30th June 2012. Galadari made a loss of Rs 266.1 million during the course of last year and a loss of Rs 986.1 million for the 6 months ended June 30th 2012. Loss per share stood at Rs 1.46 in 2011 and Rs 5.41 during the first half of this year.
EPF bought into Galadari through an investment of Rs 770.3 million in 2010, having purchased shares previously held by Nawaloka Hospitals and related parties at a price of Rs 34 per share in a week during which the debt-ridden hotel was trading at Rs 13 per share.