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No crisis in Fund: EPF Superintendent

2013 Dec 24

Superintendent of the Employees’ Provident Fund (EPF) P.W.D.N.R. Rodrigo in response to reports regarding the losses amounting to Rs. 8.1 billion suffered by EPF said there was “no crisis” in the Fund and they had distributed Rs. 115.7 billion in profits at an interest rate of 11.5 per cent in 2012.

With regard to EPF stock market transactions he said: “The EPF’s stock market transactions have been carried out with utmost care, diligence and professionalism in terms of the guidelines approved by the Monetary Board. The persons who make investment decisions are highly qualified, well trained and experienced. There are also many checks and balances to ensure the integrity of the process. Therefore, the EPF is confident that the necessary safeguards are in place to prevent any malpractices. At the same time, the EPF’s trading of shares is carried out, based on the limits of the prices recommended by its Middle Office and hence, the Front Office cannot execute transactions based on price ranges by themselves. Therefore, a dynamic and diligent process is followed, so as to ensure that the investments are made with care and transparency, in order to safeguard the Fund and ensure its profitability, stability and growth.”

The EPF Superintendent further stated: “The EPF notes that during the past few days, certain analysts and politicians have once again commenced a campaign to suggest that there is a “crisis” in the EPF, and thereby endeavoured to destabilise the Fund. The EPF also notes that during the past 8 years, the same analysts/politicians have been claiming every six months or so, that the Sri Lankan economy would collapse in a few months’ time, and have been repeatedly warning that the government would default on its debt, inflation would be rampant like in Zimbabwe, the exchange rate would hit Rs. 175 per US dollar, etc. As it is well known however, such terrible eventualities never materialised, and in fact, on the contrary, the economy has been performing at very satisfactory and stable levels. As a result, the credibility of these analysts/politicians have been tarnished irreparably, while the failure of those persons to appreciate the obvious developments in the country had also raised questions, not only about their political bias, but also their level of competency in the subject matter. In that background, the EPF wishes to inform the public and especially its members that these vituperative allegations against the EPF are without foundation, and therefore the members must not be misled by these politically motivated claims. In this regard, it must also be stated, that a Fundamental Rights action was filed against the EPF in 2012 with several similar allegations of impropriety relating to EPF’s investments in the stock market, but after a preliminary hearing, the Supreme Court dismissed the petition without granting leave to proceed.

The EPF also wishes to state that the fund management and other operations of the EPF have been improving continuously during the last several years, both in terms of efficiency of operations and benefits given to its members. As a result of EPF’s prudent investments and sound management, it has been able to declare impressive rates of return of 13.75 per cent in 2009, 12.5 per cent in 2010, 11.5 per cent in 2011 and 11.5 per cent in 2012. Such rates of return were substantially above the average inflation and interest rates applicable to normal deposits in the financial market during the respective periods. In absolute terms, the Fund also distributed profits of Rs 90.6 billion, Rs 96.2 billion, Rs 101.3 billion and Rs 115.7 billion in the years 2009, 2010, 2011 and 2012 respectively, to its members.

The investment in government securities by the EPF has been carried out since the establishment of the Fund in 1958. To do so effectively, the Central Bank’s firewall system and organisational structure has been formulated so that the EPF Department could function independently. In the same way, the independence of the Public Debt Department is also assured, just like other departments of the Central Bank, which too, deal with their own exclusive fields with professionalism and high confidentiality. Accordingly, the integrity of the Central Bank and the EPF has not been compromised at any time.

In that background, there is now a growing suspicion that the regular and periodic allegations by the same politicians, of “conflict of interest” within the EPF, are linked to the earlier failed attempts to privatise and hand over the EPF’s fund management to certain private fund managers in the early 2000s. Hence, it may be appropriate to investigate as to whether these current allegations are prompted by the same interested parties, in order to discredit the EPF management, and thereby create some public opinion that the EPF fund management activities must be privatised.

At all times, EPF investments have been made according to its governing Act, the Employees’ Provident Fund Act, No. 15 of 1958. In terms of the EPF Act, the Monetary Board of the Central Bank of Sri Lanka has been entrusted with the responsibility of managing the Fund, as its custodian. The overall objective of the Fund in investing its moneys is to provide a reasonable return to members, while safeguarding and enhancing the value of the Fund.

As a long term fund, the EPF has invested around 93 per cent of its funds in government securities, and around 6 per cent in the stock market. The balance 1 per cent has been invested in corporate debentures and shortterm government securities. The investments in the stock market have been made with a long-term focus to generate profit and value, and enhance the Fund’s capital base over the longer term. In that exercise, the EPF considers, inter alia, the intrinsic value of shares of companies and their longer term outlook, the possible enhancement of share value in the medium to long-term, the company’s governing structures and future plans, the quantity of shares available of such companies, the viability and growth potential of the relevant industry and the possible impact of the growing economy on the company. Further, as is practised by many large long-term funds all over the world, the EPF maintains its equity portfolio as a “pool of investments”, which comprises a varied collection of stocks representing key sectors, including banking and finance, diversified holdings, oil-based enterprises, healthcare, land and property, telecommunication, plantations, power and energy, tourism and leisure, trading and manufacturing.

In the case of equity investments, it must be noted that the performance of different companies and the market values of the shares of companies within the portfolio at different times, depend on global, economic, political, financial, sector-specific and company-specific, factors. In that background, companies as well as the entire share market does not perform uniformly, nor does the market prices of shares continue to rise at all times. Accordingly, there may be times during which the value of certain stocks could be lower than the cost, but such situations are almost always reversed when external or internal factors change for the better, over time.

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