EPF: The die is cast

One of the interesting developments in recent years is the engagement of the Central Bank with state and nonstate actors on various issues of concern. In the arena of non-state actors, the Central Bank’s recent parley with trade unions to assuage fears of unduly touching the funds of the Employees’ Provident Fund (EPF) in the Domestic Debt Optimisation (DDO) exercise is a welcome move.

Some years ago, a similar meeting was held by the two sides, when the trade unions wanted the EPF to stop investing in the stock market at a time it was losing money in stock market investments.

At that time, trade unions had discussions with Central Bank authorities to urge that employees be part of the decision-making process when investments are made by the EPF. No decision was made at that time.

The concerns about the EPF and the DDO are well placed going by past experiences when the fund lost billions of rupees in its investments in the stock market.

Last week, the Central Bank said there were two options pertaining to the impact of the DDO on the EPF.

According to option 1, the EPF will exchange a minimum required amount of existing Treasury bonds with 12 new Treasury bond series that mature from 2027 to 2038. These new bonds are offered with a coupon rate of 12 per cent per annum until 2026 and 9 per cent per annum thereafter. The EPF would continue to pay income tax at 14 per cent per annum on its taxable income attributable from its Treasury bond portfolio.

In option 2, if the EPF decides not to exchange the existing Treasury bonds a 30 per cent tax rate would apply to the taxable income of the Treasury bond portfolio of the EPF.

Last week, the Central Bank decided to go with option one and hence exchanged bonds.

These were some of the issues that were discussed during a telephone conversation on Thursday morning with Arthika, my nonsensical economist friend also known as good-for-nothing Somey.

“I say, is our EPF money safe with the government?” he asked. “No worries, it’s safe but I can understand the anxiety of workers because of a litany of complaints in the past over failed investments in the stock market,” I said.

“The EPF lost millions of rupees from these fund investments in the stock market. Whom can we hold responsible when bad investments are made?” he asked.

“That’s a good question,” I said, adding that maybe it is a good idea to ensure worker representation (through trade unions) in the EPF’s decision-making. That would help in being accountable and transparent in such decisions.

At this point, I could hear the conversation under the margosa tree and believe it or not, it also appeared to be on the EPF. “Gamey inna magey massina masivili naganawa sevaka arthasadaka mudala anduwen waradi lesa bavitha karanawa kiyala (My cousin in the village was complaining about the EPF being misused by the government),” said Kussi Amma Sera.

I was more surprised at the high-level response from Serapina. “Ow, mae mudal nasthi kara-ne kotas welanda pole den avurudu keepayakata issara wela (Yes these monies were wasted in the stock market some years ago),” she said.

“Mata artha-sadaka mudala gena wedi denumak nae. Eth prashney thiyenne apita anduwa wishwasa karanna puluwanda kiyala, anduwa yedena weda wala (I am not familiar with the EPF but the problem is can we trust the government in whatever it does),” noted Mabel Rasthiyadu.

While the Central Bank Governor Dr. Nandalal Weerasinghe and his officials met trade union officials to discuss the DDO, a somewhat similar meeting was held in November 2018 with the then Governor Dr. Indrajit Coomaraswamy, the first time such a meeting had been held.

“It was a productive and positive meeting in the sense that this is the first time a Central Bank Governor has met the unions and clearly explained EPF investments,” trade union leader Wasantha Samarasinghe told the Business Times at that time.

Then stock market officials welcomed the discussion. “The EPF must come back to the market as valuations are extremely attractive and there can be strict guidelines issued on investments, for example they can only invest in the S&P Top 20, etc,” said Ray Abeywardena, President of the Colombo Stock Brokers’ Association at that time.

Mr. Samarasinghe, meanwhile, said they were opposed to increasing the current portfolio of investments which is 4.23 per cent of total EPF investments to 8.5 per cent – without proper safeguards.

The EPF invests mostly in government securities, a small percentage in the share market and fixed deposits in banks. During 2010-2013, the Fund drew widespread criticism after investments in many loss-making companies in the stock market during the infamous pump-and-dump trades. In later years, new investments in the stock markets have been suspended owing to the dispute.

At that time, the Central Bank promised to send the unions within two weeks the portfolio of EPF investments in the stock market while holding a meeting every six months with the unions as an ongoing discussion. Whether these decisions were implemented is unclear.

A 2016 report of the EPF has revealed that a loss of Rs. 8.5 billion has been incurred after EPF money was invested in the stock market in 2015 and 2016.

In the annual report of the EPF for 2016, the losses incurred by the Fund between 2015 and 2016 are mentioned under the Auditor General’s observations.

It revealed that in 2015, the fund incurred a loss of Rs. 4.3 billion after investing in stocks. In 2016, the loss stood at Rs. 4.1 billion. The Auditor General says that the Fund which stood at Rs. 83.57 billion in 2015 and Rs. 79.87 billion in 2016 has not received a return on these investments.

“The recommendations of the Auditor General further note that the losses incurred by the investments in stocks resulted in the reserves of the fund to reduce,” the report said.

It was time to get my second mug of tea and it came just as I was wrapping up this column. Kussi Amma Sera walked in with the tea saying, “Mata mae artha-sadaka mudala gena therumak nae (I don’t understand this EPF),” to which I responded with a nod, reflecting on the need for the government’s accountability to ensure that the EPF got a decent deal in the DDO restructuring process and employees’ funds were not abused.