Financial Times

Expanding the role of the EPF
By Lal de Mel (FCCISL Representative on National Labour Advisory Council)
Public servants who enjoy the security of life time employment and pensions tend to be insensitive to the needs of private sector employees for a safety net to protect them from possible loss of employment and a steady income in their old age.

The current situation where the returns on Treasury Bills and fixed deposits are lower than the rate of inflation has compelled retired private sector employees living on interest income to consider dangerous investments in financial institutions which face liquidity problems and offer higher returns. There is an urgent need to have a look at the social security of private sector employees in their retirement.

During the year 2000 the number of active accounts has increased by 100,000 to 1.9 million while the number of inactive accounts has increased by 200,000 to 6.5 million. In 2001, the number of active accounts has remained stagnant, while the number of inactive accounts has increased by 419,000.

There is an urgent need to link all EPF accounts with the NIC number and provide transparency by showing all the member balances in an EPF website. May I also suggest that all inactive accounts created after 1st January 2000 be shown in the website as in a telephone directory, with an answer back facility, to minimise the injustice done to employees through the lack of focus on minimizing inactive accounts.

Web-based facilities should also be available for employers to check the accuracy of their employees' EPF records. When taking into consideration the investment portfolio of Rs. 283 billion as at end 2002, the EPF contributions of Rs. 19.2 billion in 2002 and the Administration and Establishment expenditure of Rs. 258.79 million in 2000, the cost of an investment in a web enabled powerful computer and the necessary software is insignificant.

The 'Real Rate of Return' on member balances shows an improvement in 1999 of 7.02 percent and 5.49 percent in 2000. These compare favourably with the average Real Effective Rate of 0.29 percent for 28 years and 3.24 percent for five years ending 2000. With current Treasury Bill rates below the inflation rate, there is a need to review the 10 percent tax on EPF and ETF income, the adequacy of contributions and ways and means of increasing the Real Rate of Return.

It is likely that the poor level of automation has contributed to the continued increase in the number of inactive accounts and the inability to link the NIC number to the EPF accounts. As the Chairman of a construction company, I can say that this is a matter of grave concern to the construction industry where the uncertain nature of contracts results in high labour mobility, with the possibility of creating a large number of such inactive accounts.

Private sector employees are taxed on their contributions to the EPF as a result of the reduction of qualifying payments. Their contributions to the EPF fund are taxed at 10 percent. There is a lump sum tax on the EPF and ETF benefit payments and withdrawals above a specified value are taxed as normal income. When the meagre lump sum payment is invested in Treasury Bills, the interest income above Rs. 10,000 a month are once again taxed at 10 percent.

With the rate of inflation at nine percent, Treasury Bills yielding about eight percent provide a negative return after tax. In a few years retired private sector employees without other sources become dependant on the charity of their children for their existence. Perhaps this accounts for the overwhelming clamour from graduates for non-existent jobs in the public sector.

Most countries tax superannuation payments only once in a lifetime. Perhaps the insensitivity of our Inland Revenue and Finance Ministry officials to this social injustice can be traced to the dual system, where public servants are insulated from the payment of income tax throughout their life and hence have no sympathy to the plight of private sector employees.

The Minister of Labour has indicated his interest in creating 'No Load Unit Trusts' as in Chile and Mexico to give the contributors to EPF and ETF an opportunity to invest a part of their balances in Unit Trusts at their own risk. It is necessary to ensure that such Unit Trusts are operated by public companies which practice good governance. As in most other countries, it is also necessary to exempt from income tax the fund income and the transfer of the investment into approved pension funds.
These Unit Trusts will exert pressure on public companies in which they have significant shareholdings to deliver shareholder value and declare good dividends for the benefit of the investors in these unit trusts.

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