The Employees Provident Fund (EPF) does not pay real rates of return, according to stockmarket and financial sector analysts.
Murtaza Jafferjee, CEO JB Securities noted that in times of high inflation (such as now) members earning ‘real rates of return’ are very low.
He explained saying that the Central Bank's investment of the EPF money is not based on the market forces. "Since interest rates are not market determined, in times of high inflation this results in EPF members not earning ‘real rates of return’. In the environment in which the Central Bank controls the fund, the interest rate at which it is lent is not market determined. When there is high inflation in the country, the rate of return is low," he added.
He said that the majority of investment of the EPF is either in the form of rupee loans in which the interest rate is on an administered rate (not market determined) and a mix of treasury bills and bonds.
"What the government does with the funds is not in control of the EPF. There is a major distortion this process creates with regard to the interest rates,” he said.
Explaining this further, he noted, “EPF is a large entity which is managed by the Central Bank. Therefore it is not independent, which distorts the interest rate structure in the economy.”
Dinesh Weerakkody, Chairman / CEO of the Employees’ Trust Fund from 2001-2004, also shared the same sentiments saying that the fund has not given real returns to the EPF members.
“The (EPF) is the largest social security scheme in Sri Lanka with an asset base of over Rs.577 billion, equivalent to 25 % of the GDP. The EPF provides the employer and the employee an opportunity to save for the future retirement life of the employees in the private sector. The aim of the EPF was to prudently manage the fund to ensure a reasonable return to the members at retirement. Where the fund has failed is providing real returns to its members.”
When asked whether the EPF funds which are invested in treasury bills, treasury bonds, equity, corporate debentures and rupee securities are the best options for a decent return to its members, he said, “The main objective of EPF asset allocation policy in my view should be to provide a robust mix of assets which produce the highest expected investment return while managing the risk within an acceptable range to the Fund. For the EPF the risk return trade off is paramount.”
He also noted that perhaps one area that the EPF and ETF should focus more aggressively is to keep their operating cost to a minimum. “This is an area that is often overlooked,” he said.
However he noted that despite criticism over the ‘poor’ rate of return, the EPF is still a safe, government-guaranteed option unlike private pension funds. “I would like the EPF’s portfolio risk to be below average, be capable of paying refund benefits in full and on time and earn a real rate of return. Where the fund has failed is on the rate of return,” he added.
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