CFL says invest EPF funds with transparency

The Ceylon Federation of Labour (CFL), a well-established trade union, has raised its opposition against only unions of the National Labour Advisory Council (NLAC) being consulted on the way forward in the proposed investments by the Employees Provident Fund (EPF) in the Colombo stock market.

“In our opinion, the unions in the NLAC have no status to act as proxies to the large mass of members in the EPF. The unions in the NLAC represent a mere two or three per cent of the organised working people. It is urged that the real stakeholders be reached out in making investment decisions. Investments should be monitored by an independent body with stakeholder participation,” said CFL Deputy General Secretary, T. M. R. Rasseedin in a statement to the media.

He was commenting on exclusive reports in the Business Times which reported two meetings between the Central Bank and a set of unions to discuss EPF investments in the stock market. No decision however has been taken by these unions to approve such investments.

The CFL statement said:

“The EPF established in 1958 provide a means for formal sector wage-earners to obtain some income security on retirement. The EPF is a mandatory contribution scheme that covers employees' in the private sector. Employers and employees are required to make pay- roll contributions at the rate of 8 per cent and 12 per cent of earnings respectively.

The individual account balances remain the property of each member with a nominal interest of 2.5 per cent guarantee provided by law. In terms of the 2002 investment policy the guaranteed 2 per cent interest has been interpreted to mean that it shall be calculated underlying GDP growth above the annual rate of inflation giving a real rate of 4 per cent return. It is not known whether this rate has been revised further in terms of the currently operative investment policy and this has to be clarified.

“The EPF Act has specific provisions confining its investments only in government securities. With a view to generate the highest rate of return for members of the EPF there occurred a steady deviation from established practice and, with the development of the share market, corporate bond and debenture market and commercial paper market outside the government securities market the Monetary Board began to ignore the statutory restriction placed on it and embarked on investment strategy not confining its investment in predominantly Government Securities but turn to above mentioned diversified instruments.

In 2006 the EPF took a further step to diversify its investment into infrastructure projects. As a pilot investment, the EPF invested Rs. 2975 million in Kerawalapitiya Power Project with a 20 per cent expected return annually with a 27.05 per cent shareholding in the project. It is learnt that the EPF has recovered its initial investment but no information is available on the expected annual return.

In 1995 when the Attorney General Department was consulted it was the opinion of the then Attorney General, late Shibly Aziz that investment in shares was against the EPF Act and only investment permitted as prescribed by the EPF Act were investments in Government Securities and that volatile or risky investments was against the EPF Act. The said opinion was in line with a previous opinion that had been given earlier by one of the previous Attorney Generals, late Shiva Pasupathy in the late 1970s.

When the Auditor General's Department was consulted in 2002 Attorney General K.C. Kamalasabeyson's opinion was that EPF could invest in shares although only in listed blue chip companies and not in smaller shares.

However in 1995 the EPF made a few investments in corporate debentures and later it expanded to structured securities. By 1998 the EPF further diversified its asset portfolio by commencing investments in equities listed in the Colombo Stock Exchange ( CSE). Although the EPF achieved some satisfactory results on its listed equity investments the element of risk involved was ever present in this venture.

The travails of the EPF began in the latter part of 2008. The 2012 Auditor General's Report revealed EPF investments between 2008 – 2012 in 72 listed companies amounting to around Rs. 20 million have not resulted in satisfactory returns.

All audited reports since then have repeatedly drawn attention to the many serious accounting deficiencies, management inefficiencies imprudent investments and loss of income from such investments.

The very many questionable investment and transactions especially from 2010 onwards have been since highlighted in the Auditor General's reports.

It is alleged that the Monetary Board of the Central Bank has gone beyond the authority given to it by investing in companies outside the stock exchange.

It is understood such corrupt practices take place due to the failure of the authorities to make proper use of the Investment Advisory Committee appointed by the Monetary Board.

The COPE Reports on the Bond Scam in the Central Bank from 2015 to May 2016 has come up with among other things a very strong recommendation relating to EPF. It has recommended in both the main report and the dissenting report with foot notes that the activities of EPF from 2010 until May 2016 be fully investigated to ascertain irregularities in investments, improprieties malpractices and losses to members.

The Monetary Board has invested EPF funds in several bankrupt or low performing companies. Examples are PC House, Eden Hotels, Hyatt Regency, SriLankan Airlines and the Finance Co.

The pressure to expose the EPF to high risk investment is best avoided as recourse to such investment would lead to a situation of threatening the future viability of the fund. It is our considered opinion that government securities are the best method of investment which we consider as absolutely risk free with respect to payment of interest or repayment of the principal contributing to the liquidity of the fund. Any overseas investment of EPF monies in the manner the Greek bonds were purchased will be catastrophic.

There is also the opinion that following the decision of the government to progressively reduce the budget deficit there will be less calls on the EPF which is one of the main financiers of government plans for economic development through the capital budget and that the demand for EPF funds for the government would decline and government borrowing will drastically fall in the years ahead. The evidence is to the contrary.

In Sri Lanka since independence in 1948 almost every year (except in 1954 and 1955), we have experienced budget deficits. The deficits were mainly financed from borrowings within and outside Sri Lanka. Presently, the emerging evidence is that this avenue for investment is getting larger with the growing need of the government for public funds getting larger. The political instability has resulted in the government increasing expenditure and decreasing revenue to gain popularity. This situation is going to expand the fiscal deficit that leads to increased borrowings and in turn to huge debt servicing costs. The government would be starved of funds for investment and social infrastructure development.

Investment decision making must be in the hands of stakeholders truly representing the workers whose balances/profits are at risk. Fund monies belong to the working people. The monies belong to individual workers and they have individual accounts. It is their money that is at stake and it is their opinion and consent that matters in matters relating to investment of EPF monies.

We welcome the assurance given to us at the meeting held on November 21 presided over by the Central Bank Governor that there will be a break from past practices and future operations would be more open and transparent. The need for transparency and accountability in dealing with the EPF which amounts to close upon two trillion cannot be over emphasised.”