Meaningful reforms targeted at retirement funding, including the possible segregation of Sri Lanka’s largest social security scheme, the Employees’ Provident Fund (EPF), is urgently required in order to ensure that retirees have access to a pension in future, according to a panel of experts on the subject at the recently held LBO LBR CEO Forum.

“What the wise man does in the beginning, fools do in the end. Unfortunately, pension reform is an issue that myself and many others have been advocating for a long time but the necessity for pension reform has been poorly understood politically and so political expediency is a serious issue.”

“Serious efforts were made to carry out pension reform back in 2004 and a line of funding from the World Bank was secured to implement such reforms. Since the change in government however we have now come along eight years and we’re still at the discussion stages,” JB Securites CEO Murtaza Jafferjee said.

Sri Lanka is currently in the midst of a demographic transition, which will see an estimated 25% of the country’s population crossing the age of 60 by 2040, raising very serious questions about the availability of retirement funding for pensioners within the next 10 to 15 years.

“At present, government spending on pensions accounts for approximately 12 to 14% of the GDP. However, this number is set to increase rapidly with the demographic changes that are currently underway,” Senior Professor of Demography and Dean of the Faculty of Arts at the University of Colombo, Prof. Indralal de Silva said.

With 43.4% of the workforce being covered by the EPF, and 14.4% through the Government Pension Scheme, whilst further 42.3% of the workforce remains outside of any pension scheme in 2011, the ability of the government that is in power in the next 10 years to provide adequate care for its dependent citizens may hinge on policy actions taken over the near to medium term.

“The lack of flexibility in terms of asset allocation is a real problem. Whether you’re 25 or 55, the EPF will invest the same way for you and this disregards the fact that when people are young, they have the ability to take greater risks than when they’re closer to retirement.”

“The EPF must be segregated into independent parts which deal in equity, corporate debt and government debt and a system must be brought in where each individual can decide on his risk return with the option of rebalancing his risk profile every five to 10 years,” NDB Aviva Wealth Management CEO Prabodha Samarasekera said.

The lack of flexibility was also highlighted as being problematic for individuals seeking to make Sharia compliant investments due to the system’s prohibition against drawing interest income. Particularly, in light of the growing popularity of Islamic banking in the country, Samarasekera stated that the EPF’s failure to provide other options is a major drawback.

The size of the EPF was cited as another reason for segregation of the fund into independently operating bodies.

“The sheer size of the EPF can influence prices and that is another reason why it needs to be broken down into different independent segments,” Jafferjee said.

Increasing competition in the market and thereby forcing the EPF to improve its returns was advocated as another solution.

“I think that if private funds were to give a guarantee that they will provide for example 1% higher returns over what is offered by the EPF that would be a very effective method to improve conditions for everyone. It will give customers more choice and since the private sector may have better technical capabilities, it will not be a very difficult guarantee to say that they could outperform the EPF.”

“About 45% of the workforce is not covered by a pension plan of any kind. Since Sri Lanka has no minimum social security net, going forward this group will almost certainly become more politically active and therefore they will become a significant voter base capable of influencing government policy and when that happens, the government will be forced to take steps so it is really a matter of time,” Jafferjee said.