THE GOVERNMENT OF SRI LANKA NEEDS TO CONSIDER ESTABLISHING AN INDEPENDENT ORGANIZATION TO MANAGE SUPERANNUATION
Posted on January 6th, 2020

BY EDWARD THEOPHILUS

Historical information indicates that the superannuation system to Sri Lanka was brought by the British colonial rulers and originally, it was limited to a government pension program to its employees. The superannuation system was broadened by the establishment of the Employees Provident Fund (EPF) and the system further enhanced by the establishment of the Employees Trust Fund (ETF) by Mr. Athulathmudali. The management of superannuation system passed to deviating places such as Central Bank, ETF, Labour Department, and Government Pension Department and other private institutions. This situation created risks and ultimately the consequences of risk passed to retired personnel. At the international level, the superannuation management has allowed to diversified companies with a view to minimizing risk and to offer a competitive return to fund members, however in the case of Sri Lanka the superannuation management has been subject to higher risk by diversification in various places without proper regulation and the supervision of the government doesn’t seem effective and from the point of views of economists, government pension scheme has impacted in increasing government spending.

Superannuation systems reflect the saving level in a country and the management of superannuation has been radically changed after the 1970s and household savings cannot cover the gap between investment and savings.  Therefore, the superannuation system in a country plays a monumental service role and strategic economic acumen ship for stability. However, economic policymakers were blind on this matter and were unable to make effective policies except for few fund audits.  In the year 2000, I wrote to the president of Sri Lanka about EPF management as I saw that EPF has the potential to dishonest activities and the president acknowledged my letter, but nothing happened, most probably the administrator with the president was not understanding of the subject and reluctant to talk about it.  

The Asian Bond Market, which began to invest Asian savings in Asia based on a great ideological desire of Mr. Thaksin Shinawatra showed the significance of superannuation management rather than investing Asian savings in the Western bonds.  Employees in Sri Lanka don’t understand how their savings subject to the risk and don’t understand how to quantify the risk and threat of dishonest individuals.  The central bank bond scam absorbed dividends of innocents’ employees to pockets of dishonest people and if the fund manager acted as an independent body separately from the central bank such the loss could have avoided or minimized. Arjuna Mahendran was the head of bond issuer, Central Bank and investor in bonds (EPF) and many complicated activities, which were not understood by yahapalana politicians. It was a conflict of interest. Has forensic auditor pointed out these complicated issues, I don’t know?  I pointed out to the president of Sri Lanka in the year 2000 referring to the issue of treasury bonds to enhance the capitalization of government banks.

The superannuation management is in a mess in Sri Lanka and subject to dishonest deals and insolvent threats. Central Bank of Sri Lanka has been added pressure by the management of EPF and it can see that many people visit the central bank to solve problems related to EPF. When LTTE exploded the bomb in central bank building many of these EPF customers died as those people were forced to visit the bank as the EPF was in the central bank building.

The prime role of Central bank has been ignored by its executives and the managing style of EPF by the central bank was easier to cheating activities of the dishonest governor. As the regulatory authority of the financial system, Central Bank has neglected vital roles and under the management of superannuation, the central bank has become a market player, which is a conflicting role with objectives and the role of the central bank. Central Bank also played a rural credit business, which had been a market player’s role that was not appropriate to the regulatory authority, later this role changed by the establishment of a development bank.  

The outcome of central bank operations reflects that the government should give freedom to the central bank to operate as a regulatory authority to protect the financial system of Sri Lanka and to providing research information on the impact of government policies.  Then the Monetary Board can take the right decisions on the interest rate and other matters-based research finding trends of the economy. When a regulatory authority becomes a market player, it is a clear conflict of interest and possible for dishonest activities. Former central bank governor, Mr. Ajith Nivard Cabral recently stated that the forensic audit on the Central Bank bond scam could be not accept as the central bank audited own institute as an external verification auditor, which could be considered as an act of conflict of interest. Why Central Bank wanted to go outside for a forensic audit, what is doing its training department without training its staff about security activities and bonds and any other roles of the bank.  Playing a market role by central bank is a direct engagement in creating international disgrace to the financial system of Sri Lanka and it is a crime against people of Sri Lanka, who are the owners of financial assets of the country. 

When the government considers establishing a separate corporate body to manage superannuation savings it will have forward and backward linkages to economic development and growth. The super management in any country seems like a mega business and developed countries have allowed multiple organizations as the industry involved in trillions of funds. It boosts the Colombo Stock Market opening for the listing of national and international firms like Mumbai. Colombo stock Market also needs good and effective regulation and Central bank can work on such regulation as the regulatory authority.

An Independent superannuation body will be a large organization like Bank of Ceylon, which provides more than 10000 new job opportunities for educated youths. Each super fund including individual super funds of banks and other organizations should come to the proposed corporate institution and EPF, ETF and other super funds will be operated as single organizations and a government own business. The combining of funds would not much cost to the government as current fund managers are trustees not the owners, but it needs risk assessment of investment to assess the net worth.

Trading banks in Sri Lanka have a strong pressure from the corporate market to provide credit facilities and the best policy action is to release this pressure to develop a corporate bond market under the supervision, the control and guarantee of the proposed superannuation management organization.  Good companies in various industry area of the country can issue bonds with a guarantee of the superannuation management institute and allow to invest in bonds by local and foreign investors. This action releases the pressure of local trading banks in providing working capital to companies and the central bank can play its regulatory role to control the interest rate of the country.

The proposed super management body would support to construction industry, building a high rise building in Colombo for the head office and decentralizing fund operations in regional Sri Lanka combining with the current role of Labour Department, which perform a various role in relation to collecting premiums for the fund and supervision of issues of premium contributions. It will be a mega business in the country as a government own institution.

The independent superannuation management body could be maintained a diversified investment portfolio to manage risks and generate higher returns to give the best retirement benefits to employees in Sri Lanka.  This organization can do multiple businesses such as insurance, education and training work and many other activities. It would positively impact on controlling fiscal management and reduce the budget gap or promote make an excess budget helping to good value for Sri Lanka Rupee and most probably it will support to increase the foreign value of Sri Lanka Rupee.

Another vital aspect of reforming superannuation management is to attract business for super management in other south Asian countries to increase foreign assets of Sri Lanka.  The proposed organization can manage super funds in India, Pakistan, Bangladesh, Maldives Islands and others if it shows management stewardship.

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