The Sunday Times has published a report on the EPF that gave me an unpleasant shock. The fund does not appear to have the money to repay it's members.
Before getting into the details, lets understand what the fund is and what it is supposed to do. The Employees Provident Fund (EPF) was established under Act No. 15
of 1958 and is currently the largest Social Security Scheme in the country. It is a compulsory fund, all employers regardless of the size or type of business must contribute to the EPF, even if they have only one employee.
The standard contribution is a percentage of the monthly salary of each employee; the employer contributes 12% and the employee 8%. Each month's contribution must be paid before the last date of the following month. Late payments are subject to penalties ranging from 5% to 50%.
The EPF contributions are supposed to be invested for the benefit of the employees. On retirement, the employee can withdraw whatever balance is to his credit - this should be the amounts contributed over the years plus whatever interest earned.
The critical point to note is that the EPF is fully funded by its contributors. The Government does not put in one cent. All the employee gets back is what was paid in by himself and his employer (plus whatever interest).
Therefore there cannot be any shortfall in funds - unless something is seriously wrong. Yet this is what there appears to be - a shortfall in funds. According to the report it appears that withdrawals from the fund by retirees are being paid out of the new contributions made by members.
"Employers’ contribution to the EPF in 2011 was Rs. 61.9 billion with a
sum of Rs. 47.3 billion being withdrawn to pay back EPF money for
retirees and this amounted to 76 per cent of the total contribution....In 2012 and 2013, 115,000 and 114,000 applicants had withdrawn Rs.48.7
billion and Rs. 50.2 billion, respectively. Employers’ contribution for
EPF in 2012 was Rs.70.6 billion and in 2013 the contribution was Rs.80.9
What should happen by rights is that the withdrawals need to be paid from the investments made, the fresh contributions made by existing members must be invested to provide a return for the new contributors, not pay the retirees. This probably happens on paper but the fund is obviously facing serious problems of cash flow.
So what has happened to our money?
According the EPF's annual report for 2011, 90% of the funds are invested in Government securities, 7.9% in the stock market and the rest in corporate debentures and other debt instruments.
A couple of things raise a red flag.
First is increase in the proportion of the fund invested in the stock market which has jumped from 1.3% in 2009 to 5% in 2010 and 7.9% in 2011.
The second is the delay in publishing the annual reports for 2012 and 2013. We are seven months into 2014, yet the latest accounts available are for 2011. Late publication of accounts is often one of the first symptoms of malpractice. My big worry is has the percentage of funds invested in the stock market increased significantly since 2011?
We have learned of the fraud that has taken place with regard to the fund's stock market investments. A loss of 11.7 billion was reported in 2011 due to stock market losses - insignificant compared to the funds balance of Rs.1,300 billion but compared to the contributions and withdrawals in 2011 the loss is very significant: 18.9% of the contributions or 24.7% of withdrawals.
We know that a part of our money has been lost through fraudulent investments in the stock market. What of the rest? There have been other unauthorised investments such as Rs.2.97 billion on a power generating company, Rs.810m in a loss-making hotel, Rs.500m in an airline (Mihin Air, perhaps?) and some others. (See this report for a few more details). The biggest issue is that we do not have proper information which prevents in-depth analysis- the easiest way to cover a crime is by hiding the evidence, hence the ongoing campaign against transparency in all spheres.
Regardless of the stock market and other dubious investments I believe the bulk (75%-80%) is still in treasury bills and bonds. These are Government debt and there should be no issue with cash flows - unless the Government is bust and unable to service its debt. This, I am afraid is the sad reality that is becoming ever more evident.
In simple terms, the Government has borrowed this money from the EPF. It now needs to start repaying and is facing difficulties. The way the Government handles this with other lenders is simple - they simply borrow some more and repay the loan. They take new loans to pay old ones and even have to take additional loans to pay the interest (I have looked at this issue in come depth here).
So why not do that with the EPF? The reason is that they are trying very hard to 'manage' the debt statistics. With external lenders there is no choice but to repay - when the money belongs to ordinary citizens then the Government will try some tricks to postpone payment. This is the driving force behind the moves to turn the EPF into a pension scheme. A lump sum payment will be repaced with a monthly payment, paid over heaven knows how many years.
The sustainability of Sri Lanka's debt is an issue, the rating agency Moody's recently warned that overall debt affordability is weak. The Government will not admit that it's debt levels are too high, but it's actions in this instance betray the reality of the situation.
After all, it is not Government money that we are asking for, it is our money that was given to the Government that we want back. Is that too much to ask for?
Ratmale left an excellent comment on this post. With regard to administration costs, it is essential that these be kept to a minimum. As per the annual report, the EPF administration cost is around 0.68% of the fund. However the Government runs two funds the EPF and the ETF. Both funds can be managed by a single entity with almost no increase in administration costs, so for optimal benefit the management of both EPF and ETF should be merged.