Unions urge worker representatives to manage EPF investments

Unions, representing both workers and employers, are taking cautious approach to a proposal from an Asian Development Bank (ADB) to reform the Employees Provident Fund (EPF) by maximising its returns largely through investing in the stock market among other options.

The draft White paper on the reform of EPF Legal and Operational Frameworks by US-based Aries Group Ltd under an ADB project (part of a US$300 million loan from the ADB) was discussed recently in Colombo between the consultants and members of the National Labour Advisory Council (NLAC) under the aegis of the Labour Ministry. The Unions are seeking a greater role in the management of these funds, which were earlier invested allegedly in several loss-making entities in Colombo’s stock market.

Anton Marcus, Joint Secretary, Free Trade Zone and General Services Employees Union, in a letter to the Labour Ministry has submitted their response to the ADB proposal.

It says: “The white paper states that it is ‘on retirement savings reform, to include establishing professional fund managers and to consider demographics, cost of current government financial support of retirees and projected fiscal implications, setting out options and making recommendations while considering political constraints, and shall be submitted to Cabinet.’

“The draft white paper states: ‘ Fortunately, the EPF Scheme would not face any issue of sustainability since it is a fully funded DC ( Defined Contribution) scheme, members of EPF Scheme reaching old- age will all have their own accumulated pension assets,’ It is also said, ‘ The EPF Fund is growing at over 11 per cent per year and annual payments represent less than 40 per cent of contributions plus net investment income, thus, it will continue to generate liquidity over the immediate future.’

“Yet reforms are sought to satisfy ‘the need to undertake major reforms in a number of key strategic areas to remove existing barriers towards achieving this vision, which include capital market reform.’ To this end, ‘The strategy identified increasing the participation of pension funds in the capital market as a priority for this purpose.’

“The total focus in the draft white paper is to allow ‘Private Fund Managers’ termed ‘external asset managers’ to use EPF monies for better investment as they say ‘with international best practices’ on the sole argument, that would provide better investment opportunities for the benefit of individual members. It stresses that ‘ provision in the

EPF Act requiring the Monetary Board to be the Custodian do not need to be changed’ but the Act could be amended to provide the Monetary Board to:

Issue rules for the licensing of

external asset managers

which should address as a minimum the governance structure of such asset managers, fit-and-proper standards for the board and key senior executives of such managers, minimum standards on financial reporting and disclosure to all stakeholders, minimum standards for key operational processes and systems (including the real-time linkage of IT systems with EPF Department and the Custodian) and the types of fees and their maximums;

Have clear basis for financial and operational audits of such asset managers and a defined basis for delisting of

those asset managers who fail to meet the required standards of practice at any time;

Ensure that the same set of investment funds are provided subject to the predefined asset allocation minimums/ maximums by each asset manager (the asset managers can vary their actual asset allocations within the ranges specified). Require that the asset managers set up these investment funds with their own seed money and provide a twelve month performance history before they can start actual operations; and : Ensure that the asset managers have clear and comparable fee structures which are within the limits laid out in the regulations.

Conclusions

“We don’t accept the necessity to have ‘ External asset managers’ despite the oft repeated condition of ‘international best practices’ which is a hacked term used with ease. We are strongly of the view, any and all reforms should first accept and duly incorporate ‘ worker representation’ in the management of the EPF.

“While there are seemingly positive proposals like ‘Employee centric record keeping’, ‘Option for partial withdrawals after retirement’ and also ‘Individual Member choice in investments’ that should be further discussed in detail, we wish to stress on the important issue of who has the sole legal right to manage the 1,841.5 billion rupee and still growing EPF.

“We have made a very strong case to have ‘elected worker representation’ in the management of the EPF, when we submitted a detailed explanatory letter to the President, after the Bond Scam investigation report was made public.”

“The total focus in the draft white paper is to allow ‘Private Fund Managers’ termed ‘external asset managers’ to use EPF monies for better investment as they say ‘with international best practices’ on the sole argument, that would provide better investment opportunities for the benefit of individual members.