AG highlights loophole in EPF’s 30% refund scheme

The Auditor General has highlighted a possible loophole in the laws governing the ‘30 percent’ housing and medical refund scheme, through which well over Rs. 40 billion has been withdrawn from the country’s largest retirement fund since 2015.

“As the legal process required to carry out the follow up action to ensure whether the contributions thus redeemed by the members are utilized for the particular purposes indicated in the Act had not been set out in the amended Act, it could not be ruled out that there would be a possibility of using that money for another purpose subsequent to the receipt of the contribution money,” it said. The comments were made in the audit of the Employees’ Provident Fund (EPF) annual report for 2015, which was published recently along with the annual report for 2014 after years of delay.

The 30 percent refund scheme allows an EPF account holder to refund 30 percent of their EPF deposits for the purpose of building a house, or in case of a severe medical emergency for themselves or their immediate family.

Although the amendments to the EPF Act outlining the refund scheme was passed in 2012 under the previous government, it came into effect in July 2015, after the then Finance Minister Ravi Karunanayake proposed to activate the law through the January 2015 interim budget.

Already, EPF members are eligible to draw a guaranteed housing loan from financial institutions worth 75 percent of their EPF balance, although housing loans taken from financial institutions are subjected to scrutiny.

From July to end-December 2015, Rs. 8.5 billion was refunded by 10,000 eligible members under the 30 percent scheme, according to the 2015 Annual Report. Further, Mirror Business reliably learns that Rs. 35 billion was refunded by account holders during 2016. The 2017 figures have yet to be finalized.
After the scheme came into effect, the Rs. 2 trillion retirement fund was observed liquidating some of its investments, and the then Central Bank Governor Arjuna Mahendran said that this was done in order to maintain liquidity in the fund to allow EPF members to make use of the 30 percent refund facility.

He had also said that the EPF may have to liquidate more of their investment portfolio as the number of refunds increase.

The EPF has to maintain higher liquidity going forward, since in addition to the 30 percent reform scheme, Sri Lanka is an ageing society, and while contributions to the fund are increasing, refunds have been increasing at a higher rate. From 2013, when net contributions amounted to Rs. 29.9 billion, the figure has fallen to Rs. 9.9 billion in 2016.

The refunds increased by 39.4 percent in 2016, compared to 19.4 percent in 2015 and 29.7 percent in 2014, while contributions grew by 15.5 percent in 2016 compared to 13.8 percent in 2015 and 12.3 percent in 2014.

Due to this mismatch, the increase in the EPF’s investment portfolio has been gradually slowing down.
(CW)