This is part 2 if our article series on the EPF, Pension Fund dilemma. Here I explore the issues in the past over the EPF and the future of the National Pension Fund proposal.Part 1 is linked here: http://intca.org/epf-pension-fund-lka/
What is all this about abuse of the EPF under the MR regime ?
As I said early the EPF has a lot of capital which a Sri Lankan government otherwise as little access to. It has been reported that during the tenure of Central Bank Governor Ajith Nivad Cabral, EPF capital was invested in the Colombo Stock Exchange. The massive rise in the All Shares Price Index of the CSE was partly attributed to the influx of capital through the EPF investments in shares of strategic entities like banks. The Central Bank during this time – 2010 to 2014 – used these investments to buy shares in private banks and force in Directors to the Boards appointed by it. Thereby gaining massive control over the banking sector. This might seem legal. But it also seems unethical. There are questions whether these were prudent investments and whether they created loses for the EPF.
Why combine the EPF and ETF and make it a National Pension Fund?
The basic rationale for combining them seems to be to reduce the administrative costs of maintaining two separate funds. It also reduced the transaction costs and time for firms. Handling the payments to two different funds handled by government bureaucracy can be a pain in the – I’ll mind my language. Such easing would also contribute to increasing Sri Lanka’s ease of doing business index and make us more attractive to foreign investors.
The more large scale impact is through the creation of the National Pension Fund. Pension Funds in the US, Europe and Japan don’t just protect the retirement incomes of millions in the labour force. They also act as major actors in the financial market of countries. The aim of the government is to create a similar large-scale domestic actor in the financial market. Thus, when viable local ventures are looking to raise funds through share offerings, the Pension Fund could become a major shareholder. Instead of relying solely on foreign investors to bring in capital investments, this domestic actor would do the needful.
Foreign investors end up taking away the profits from their investments in Sri Lanka. The best example is the Katunayake Airport Highway. The Chinese investors take away the profits of the highway to pay for the costs of building it. However the theory is that if our Pension Fund would be a significant investor in a future highway, parts of the profit of operating it would stay in Sri Lanka and add to the capital in the fund. Thus, the benefits of development accrue in Sri Lanka.
Why so much hate and rage against a National Pension Fund ?
Firstly it’s because there is little understanding about the whole concept. But then it doesn’t help for the fact that neither Prime Minister nor any other government official properly explains whole process and what benefits they expect and how the National Pensions Fund will operate. When democracies are faced with a lack of proper information the result is pandemonium, especially when the matter involves the money on which millions depend on.
For those who are well off the EPF and ETF money may seem like a bonus they get for working so hard for years on end. It is probably the money they can use to upgrade from that C-Class Merc to an E-class. But to many the money represents the chance of social mobility for themselves and their children. Finally they are able to buy a small car and enjoy a sliver of comfort in retirement. Others are relieved to be able to pay for their child’s education abroad or their CIMA exams or enter their grandchildren to a private school.
Thousands upon thousands of Sri Lankans in non-departmental employment who had such dreams are now scared that instead of the lump sums they expected, they will end up with a monthly tithe. No one wants to receive Rs. 50,000 a month when they could have taken Rs. 5 million and invested it for higher returns or made those dreams come true overnight.
Even as I write this article, my own father is confused about the future of his EPF money he hoped would allow him to make some prudent investments. It is his entitlement for working as a doctor for 20 years. It drives strong emotions of resentment against anyone he feels will mess with the entitlement. With information about the whole thing being low and media and opposition politicians making all kinds of claims, the democracy is acting on emotions.
Democracy is strong when people are able to express their true opinions at the elections and prevent autocracy. But when the lack of information and misinformation begins to make that democracy act on sheer emotions, it does not look very pretty at all. Even the educated begin to act like the mob of Rome.
What is best for our economic development ?
“Combining them is fine. What the PM needs to tell is look the new Pension Fund will work like any bank. You will be able to keep your money in it and it will get your consent on how to invest your money in prudent projects; from shares in bluechip companies in the stock exchange to government development bonds for the Northern Highway”. That is what my father had to tell when I had a rational conversation with him about the whole issue. He has the scare that the government will screw up the whole process and he will end up losing the EPF money he had dreams on investing. Its shows how reluctant Sri Lankans are to trust the government with introducing and successfully implementing new policies, especially when it involves their personal money.
I think my father’s idea about the possible operation of the Pension Fund like an investment bank for the Provident and Trust Fund account holders. It will allow loans to be taken with the personal fund account as collateral while in employment. On retirement it allows one to take one of two options. Either to withdraw the money or allow his/her allocated investment officer to handle investing their money prudently. This would apply to existing EPF/ETF holders.
For future employees, they will start contributing to the national contributory pension fund which is held within the National Pension Fund. They will receive a monthly pension instead of the ability to get an investment account on retirement.
How can the government move forward on this ?
The prime factor is proper information to the public on the matter. Release to the public the entire plan for the pension fund in a manner they can understand it and not a 100 page report with technicalities. Hold public events and TV debates and programs about it. Explain how other countries have benefited from such National Pension Funds. It should not be mere appraisal information. They need to address obvious concerns like Pension Funds losing money during the financial crisis and the concerns about corruption. The PM being the main person behind these policy decisions needs to explain how the good governance paradigm will be applied to address these concerns.
And we don’t want to merely listen to US or European policies on these matters. We also want to know what policy innovations Sri Lanka can apply. Sri Lanka struggles with a crisis of identity. Every policy that is believed to be a foreign imposition aggravates that crisis. That needs to be kept in mind.
In this regard the media and the opposition politicians also need to be responsible. Merely using that identity crisis for political gain or to increase readership/viewership is selfishness. What is patriotic is to point out the exact aspects in the pension fund policy that has gone wrong and to point out distinctive add-ons catered to Sri Lankan needs and social norms and practices. Unfortunately our toxic political culture of highly polarised divisions in the eyes of the voters, will make this a difficult request to fulfill.
Overall I support the idea for a national pension fund. But if proper information is not provided on these changes, I too support the maintaining of the status quo. The last regime did the mistake of not informing the public about their development projects properly and the lack of information led to the calls of corruption leveled against it. We don’t want a white elephant of a pension fund either. And we as the people of the democracy would like to judge ourselves if it’s going to be a white elephant or not.