Creating private sector pension fund, a timely move

BY Gamini Abeywardane

Among the measures announced by Prime Minister Ranil Wickremesinghe in his medium term economic plan for the country is the proposal to set up a state sponsored pension fund for the private sector. The fund to be set up by amalgamating the Employees’ Provident Fund (EPF) and the Employee’s Trust Fund (ETF) is to be managed by a board consisting of professional investment managers as well as trade union representatives.

The idea at once seems to be a timely one because most developed countries have such funds which are paying higher returns to the contributors by growing and enhancing the fund’s value through prudent investments. It has been proposed that the independent and professional persons would be appointed to manage the fund and they would be made accountable to the constitutional council thus eliminating room for political or bureaucratic interference with the day to day management of the fund.

This kind of independence is a salutary measure as there are enough examples in the past where questionable investments have been made both by the EPF and the ETF putting people’s money into peril. There were also allegations that such funds were used during the previous government to buy shares in some of the respectable financial institutions and private banks with the idea of appointing political cronies into the managing bodies of such institutions opening avenues for political interference.

Currently there is no law to ensure that professional managers are appointed to the governing bodies of these funds and often government in power appoints them according to their political preferences the same way members are appointed to the boards of other state owned entities. Only a small percentage of the funds are invested in the stock market and a major part is invested in the government securities. In a situation of this nature question of professional fund managing does not become much relevant as the funds are invested in the safest manner without much emphasis on high returns.

If the two retirement funds are to be amalgamated as proposed and converted into a pension fund prudent management and high returns would be necessary in order to pay continuing pensions that are commensurate with the cost of living. The introduction of private sector pensions will one way reduce the competition for state sector employment. Like in some of the developed countries people with higher income will be able to contribute to more than one pension fund paving the way for a comfortable retirement with adequate income.

The fear that this amalgamation could lead to mismanagement is not altogether unrealistic. That is why it is essential to have top fund managers with integrity at the board level to manage it. When there are massive amounts of money available there is always room for corruption. This can be curtailed by including independent persons with suitable background who are not strictly fund managers and trade union representatives also in the board of management.

With proper fund managing it will also become possible for the pension funds to invest in highly profitable ventures both in and outside Sri Lanka ensuring a higher growth for the funds. If the funds are managed properly there would not be much opposition to the idea of channeling more money into profitable and nationally important ventures by way of investment which would ultimately help the economic development of the country.