EPF’s asset base grows in 2020; but returns to members slip

• Fund’s total asset base closes in Rs.3tn after adding Rs.284bn in 2020
• Declares 9% return on member balances, down from 9.5% in 2019
• Historically low interest rates identified as key reason for lower return
• Proposed amendments to investment guidelines expected to help fund generate more consistent returns

The Employees’ Provident Fund (EPF), Sri Lanka’s largest retirement savings fund, grew by 11.2 percent or Rs.283.9 billion in assets in 2020, albeit the returns afforded to the member accounts slipped amid the fast descent seen in the country’s interest rates.

The fund size, which grew from Rs.2.54 trillion to Rs.2.82 trillion by the end of last year, declared 9.0 percent interest rate on member balances in 2020, slightly down from 9.5 percent in 2019.

However, the amendments to the investment guidelines of the fund are already underway to generate consistently higher returns to the members, as there could be a rebalance in the investment portfolio, which is disproportionately skewed towards the government securities.

By the end of last year, 93.4 percent of the fund’s investment portfolio was in government securities, while only 2.8 percent of the assets were in equities, with the balance is spread through corporate debentures, fixed deposits and reverse repurchase agreements in the proportions of 1.2 percent, 2.0 percent and 0.6 percent, respectively.

ICRA Lanka Ratings, a rating agency in Colombo, recently assumed that the fund would have been in a position to make considerable capital gains, elevating its effective rate of return in 2020, due to its excessive tilt towards treasuries.

When the yields drop with the market interest rates, bond prices go up generating capital gains.

The EPF in 2020 generated a total investment income of Rs.285.4 billion, an increase of 10.2 percent compared to 2019. The bulk of the investment income came from interest income, including the amortisation gains, which continued to remain the main source of income to the fund, which logged a growth of 8.9 percent to Rs.277.4 billion.

Meanwhile, the EPF recorded a net profit of Rs.244.9 billion in 2020, after adjusting for operating expenditure and tax expenditure an increase of 9.9 percent from a year ago. 

However, ICRA Lanka said, with the current risk profile, the fund might find it challenging to maintain effective yields at higher levels going forward, due to the current low yields in treasuries.

“As at end of 2016, more than 75 percent of its treasury holdings, which had weighted average yield of 11.26 percent, were expected to mature after 2021,” the rating agency added.

The fund in 2020 made Rs.109.7 billion worth of refunds to the members and their legal heirs while it received total contributions of Rs.150.7 billion.

Sri Lanka is in a dire need of more inclusive social security net/s to provide safeguard for those who are not covered by the EPF, as the majority falls outside the EPF, as they are either self-employed or in the informal sector.

Life insurance remains a viable alternative but it is still at a nascent stage in Sri Lanka, with the large majority of the population being unable to afford long-term insurance policies, due to the poor economic conditions.