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Pensions and ETF and EPF – what’s all this Welfare jargon ?

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Talk about Provident Funds, Pension Funds and the issue of some combined fund has created a confused buzz. Here is an attempt to try to unravel the finer details, as simply as possible.

Welfare of the people is at the core of the state’s responsibilities. Welfare of its labour force especially in their retirement comes under that responsibility. The emergence of the Welfare State is attributed to reforms introduced by Bismarck in the 1870s in Germany. It set out a chain reaction throughout Europe as states began to provide welfare to their working population. Generosity or state responsibility weren’t the driving forces. Instead, it was the scare of a socialist revolution spread by Marxism. Among the plethora of welfare actions introduced over the past century has been pensions. Our grandparents are usually quite proud and happy about their pensions. It has become a major government expenditure over the years.

Pensions are , at least in Sri Lanka, synonymous with government jobs. True, for most of the last century most Sri Lankans with a salary of sorts have been public employees. But things have rapidly changed over the last few decades as the private sector as enlarged. While public sector employees receive a healthy pension from the government coffers, private sector employees have no such luxury. Instead they have the Employee’s Provident Fund (EPF) and the Employer’s Trust Fund (ETF). They have acted as their pensions, providing them with capital to survive and enjoy retirement.

Why are pensions or these provident or trust funds required ?

The purpose is to firstly provide the assurance to the labour force that they gain something for the future from working hard for most of their lifetime. Secondly, it makes them have a sense of security about retirement and hence do not need to save a large part of their salary. Hence consumerism is encouraged. Saving is good for the economy, but if most of the salary ends up in savings, demand in the daily marketplace drops and the service sector suffers leading to high unemployment. Thereby, these measures ensure that the GDP continues to keeps ticking and many self-employed persons can gain a sustainable livelihood.

Do all employees with ‘government jobs’ receive government pensions ?

No. State owned enterprises and corporations like Sathosa and Civil Aviation Authority are considered semi-government and employees receive EPF and ETF instead of pensions even though the government technical pays their salaries. In addition many new government employees in state banks are also been given EPF and ETF and not the pensions that were so emblematic, in the past, of the high demand for jobs in that category. Only new employees of government Departments like the Department of Pensions receive the pension benefit.

Government pensions seem disliked by policy makers and experts today, why ?

People obviously love pensions if they are available. But then people like my father prefer their EPF and ETF because it provides them with a significant post-retirement capital for investments, without a mere monthly tithe to survive. In addition the Finance Minister and Treasury Department especially dislike pensions. Mainly because they add to government expenditure and widen the budget deficit which hovers around 6%, generally, in Sri Lanka. In fact the month of November alone saw the spending of over Rs. 13 billion on pension payments. Totally the government spends about Rs. 180 billion annually on pension payments. It’s as expensive as paying the whole current government workforce plus another one. So no wonder they dislike pensions.

http://www.pensions.gov.lk/index.php/en/component/content/article?id=193

Further the IMF and World Bank continue to encourage the use of contribution based pension funds instead of the government budget backed pension schemes, which Sri Lanka currently follows. The reason is they do not wish governments using their concessionary loans and grants to pay pensions to old timers.

How does the EPF function ?

  • The EPF was established to provide for the payment of superannuation benefits to persons employed in the private and corporate sectors, through a contributory mechanism provident fund.
  • The objective of the Fund is to ensure that an employee receives a lump sum in his/ her old age whereby he/she and the family can live in retirement without depending on the State or society.
  • The employer is required to deduct eight percent from the earning of the employee and contribute twelve percent from the organization towards the EPF account of the employee.
  • Withdrawal in lump sum possible at retirement age of 55 (men) and 50 (women) or due to a permanent disability.

How does the ETF function ?

  • Every employer to whom the ETF Act applies must make a contribution on a monthly basis of 3 percent of the total earnings of the employee.
  • There is no recovery from the employee and the liability of this contribution lies solely with the employer.
  • Differs from EPF since it acts as a social security tool. An employee is able to withdraw money every 5 years as a source of investment capital in a house or car, in addition to when a permanent disability occurs. Otherwise lump sum withdrawal at 60 years.

Salary.lk – Social Security and Pension System in Sri Lanka

Social Security and Pension Schemes in Sri Lanka: Social security provisions exist for both public sector and private sector employees. The Pensions Department which administers the Pensions Fund does so under the regulations contained in the Minutes on Pensions.

How big are these funds and where is all their money ?

The EPF is huge. Its estimated to be worth Rs 1300 billion as of 2013. That is an enormous sum of money relative to state resources. With a Treasury that is usually running on near empty, the EPF seems like a very good source of emergency capital for investments. In fact the EPF has already invested in government securities and bonds. 95% of its value is held in them. The rest is held in corporate bonds and equities. The Central Bank is the fund manager while the Labour Department handles the administration.

Welcome to Employees’ Provident Fund, Central Bank of Sri Lanka, EPF Sri Lanka

The total investment portfolio (Book Value) of the Fund grew by 13.7 per cent from Rs.1,105.5 billion in 2012 to Rs. 1,257.3 billion in 2013. The investment policy of the Fund continued to focus on providing a long-term positive real rate of return to the members while ensuring the safety of funds and maintaining a sufficient level of liquidity to meet refund payments and other expenses of the Fund.

The ETF is smaller in comparison at only around Rs.180 billion, since it came into being only in 1981 and also because it only involves a 3% of earnings of employee contribution by the employer. It too has most of its capital invested government bonds and securities.

.:: EMPLOYEES’ TRUST FUND BOARD ::.

Section 8 (d) & Section 9 of the Parliamentary Act No. 46 of 1980 empowers the Board to invest its funds. Investment objectives, Asset Allocation & other guide lines and Code of Conducts & Ethics for the staff of Investment Division approved by the Board of Directors have been stipulated in the Investment Policy.

What is the difference between these Provident funds and Pension funds ?

What are the main differences between a provident fund and a pension fund?

Provident funds and pension funds are types of retirement plans used around the world, but their specifics differ from region to region. Provident funds are prominent in Asia and Mexico, generally operating like Social Security does in the United States.

In Part two of this article, I will be exploring the abuses of the EPF under the previous regime, the idea of a combined national pension fund, examples of it from abroad and policy recommendations for the government on the matter. Please note again that I am no expert on these matters. I am simply a youth with an interest in learning these finer details and presenting these in as simple a manner as is possible to create Informed Opinions for Informed Democracy. 

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