Amalgamation of EPF and ETF: Points to ponder
The recently announced proposal to amalgamate the Employees’ Provident Fund ( EPF) and the Employees’ Trust Fund ( ETF )has stirred a hornet’s nest. It is a popular topic of discussion too, particularly among beneficiaries (members) of EPF and ETF. However it is appalling to find that most people who have an opinion on the topic are ignorant of some of the basic facts about the funds, and even worse have a completely wrong notion of the two funds. Having been a former Chairman of the ETF Board I though it is perhaps not out of place to share my knowledge with the general public, so that their arguments for or against the proposals could be based on a proper understanding of the two funds.
This is certainly not the first time such an amalgamation has been proposed, but all previous attempts just fizzled out. At the moment I do not have any strong views either for or against the proposal since I am not aware of the final proposal. However I believe that the proponents of the amalgamation have done their homework well and seem to be serious about it this time. First it is important to understand the two funds and their similarities, differences and objectives. It is useful to evaluate how the funds have performed in terms of the dividend and interest declared to the members of the funds. In evaluating the two funds it must be borne in mind that the EPF makes refunds only once in the lifetime of the member while the ETF may make refunds several times during the lifetime of a member.
The returns also do not quantify the value of the benefits provided by the ETF. Therefore the ETF return to members is slightly more than what is shown as dividend plus interest. ETF paid 10 per cent and EPF paid 10.5 per cent during the last two years. The lower figure of ETF is surprising since ETF returns were usually higher than EPF many years ago. One reason may be the high administration cost of ETF of around 5 per cent of income. This is a good argument for amalgamation. In the case of ETF this includes the costs of enforcement but whether the Labour Department’s enforcement cost is recovered from the EPF is not known.In both funds the 2012 portfolio indicates over 90 per cent in Government bonds, Treasury Bills and Rupee Loans. The investment in the stock market is only around 5 per cent. Therefore members need not fear about the security of their money
Even if the stock market crashes to zero the loss will be negligible. In good years the gains from the stock market will be very useful. In fact during the 1990s we claimed that 1 per cent of the ETF dividends to members that year came from the realised gains from the stock market. At that time there was no “mark to market” mechanism, but only a provision for diminution of value based on market price. Otherwise with unrealised gains the benefit would have been even greater. Although small, the investment in the stock market must be purely in the interest of the members and should not be used by Government to control companies. In fact, in the 1990s ETF had a policy of not taking up more than 10 per cent of the issued capital of any company and not using its proxies for voting for or against any resolutions that would not be in the interest of its members. The ETF Board of Directors, in the case of ETF, and the Monetary Board, in the case of EPF, are trustees of the funds; they don’t own the funds. I understand that at one time the investment policy was thrown out at ETF and even 100 per cent of the share capital was bought. I am glad to know that EPF and ETF both have investment policies now and have investment committees which take responsibility for their investment decisions.
In the early 1990s ETF was under immense pressure to invest in a low interest debenture significantly lower than the prevailing Treasury Bill yield rate. The Board refused, resulting in the Chairman (myself) being asked to resign and the Board being given a “telling off”. Later when the President realised that the Board acted in the best interest of the fund, I was re-instated. The architect of the ETF is considered to be Lalith Athulathmudali who realised that 3 per cent from the entire working population in the private and corporation sector would be significant and could create large organisations, particularly for infrastruture, which required large capital bases. Colombo Drydocks Ltd (now Colombo Dockyard) as well as Lanka Cement were beneficiaries then. At that time the market could not raise sufficient funds from the public for such large projects. Today the situation is different and the ETF’s role in contributing to capital is less significant. Another declared objective of ETF was “to promote employee participation in management through the acquisition of equity interest in enterprises”.
This caused a lot of anxiety in the private sector at that time and it was thought best to ignore this objective. The reason for inclusion of this objective was that employee participation at management and Board level was popular in some countries at the time. This concept is no longer in vogue. Therefore another objective of ETF is no longer relevant. Whatever the new mechanism is, it should have a strong Board with representation by unions and the Employers Federation of Ceylon. It should be able to resist unlawful directions from the Government. It should not be considered a captive source of funds. Once when I received a demand for funds from the Superintendent of Public Debt referring to ETF as a captive source, I asked him to define a Captive Source. He answered, perhaps in lighter vein, saying a captive source is one where the Chairman would not dare to resist a direction from the Government.
Many years later I came to understand that Government kept asking for funds at low interest and then asks the Board why the dividend is so low! Once the Minister in charge informed that under a particular section he could give the Board special directions about investments. We consulted appropriate legal opinion and informed the Minister that what is meant by that section is not special directions about investments. Many years later ETF was brought under the Ministry of Finance, and now under the Prime Minister.The purpose of this article is to enable those who express opinions on the proposed amalgamation to do so with greater information. It is a pity that the latest published Annual Reports of the funds are still only of 2012. Annual reports must be published in time and must also be submitted to the National Labour Advisory Council.
(The writer was Chairman of the Employees’ Trust Fund Board during 1989 to 1994, and was later appointed to the Board by the Finance Ministry. Subsequently he served two terms as the Employers’ Federation of Ceylon representative on the Board).