A substantial loss amounting to billions of rupees has allegedly been incurred by the Employees’ Provident Fund (EPF) during the period from January 2002 to February 2015, according to Verité Research, a private Colombo-based think tank.
The loss has been incurred mainly due to the Government’s irregular transactions made on behalf of the EPF, Verité Research notes, quoting a forensic audit report compiled based on a request by the Central Bank of Sri Lanka (CBSL).
According to Verité, the EPF has incurred a net loss of around Rs. 2,556 million out of primary bond market transactions from January 2002 to February 2015. During the same period, the EPF had incurred a loss of Rs. 8,973 million, whereas the total gain had been Rs. 6,417 million.
Citing the forensic report, Verité Research also revealed that from 1998 to 2017, the EPF had incurred an impaired and realised loss of Rs. 9,470 million in listed equity and Rs. 389 million worth of losses in unlisted equity. Further, mark-to-market loss was Rs. 24,144 million by the end of 2019 and Rs. 500 million by the end of June 2021.
In terms of the irregular transactions of several companies including LAUGFS (Pvt) Ltd., Lanka Grains, and SriLankan Airlines, shares had been purchased at Rs. 48 when the stipulated price had been Rs. 40. This investment had resulted in a massive loss. It is revealed that the shares had been purchased following a presentation made by LAUGFS to the Central Bank Governor at that time.
Similarly, a total loss of nearly Rs. 652 million had been incurred by the EPF due to an investment made in Lanka Grains. It is revealed that the investment had not been part of the investment committee plan and the CBSL Governor’s explanation had been that it was a viable project considering its prospects and the flourishing poultry sector, as per instructions of the top management.
Similarly, the EPF had also incurred a loss of nearly Rs. 500 million as a result of the investments made in SriLankan Airlines. It is revealed that the investment was made despite the middle office and the investment committee recommendations to the contrary. Further, it is recorded that a decision may have been made based on instructions from the then Government.
Moreover, a total of Rs. 752 million in net losses have been incurred by the EPF in the secondary market from 1 January 2002 to 28 February 2015, Verité noted. However, the Presidential Commission of Inquiry had revealed a Rs. 6,400 million total gain by Perpetual Treasuries Limited (PTL) from the EPF between 1 February 2015 to 31 March 2016.
Largest social security scheme
The EPF was established under EPF Act No.15 of 1958 and is currently the largest and most widespread social security scheme in Sri Lanka.
With an asset base of Rs. 2,814 billion as at end-2020, the EPF is a little ‘peace of mind’ for the employees of private sector firms, State-sponsored corporations, statutory boards, and private businesses.
The aim of the EPF is to assure financial stability to the employee in the retirement stage of life and to reward the employee for their role in the economic growth of the country.
According to the EPF, the fund’s administrative aspect is controlled by the Department of Labour whilst the management of the funds is entrusted to the Monetary Board through the Employees’ Provident Fund Department of the CBSL.
According to the EPF Act, an employee is required to contribute a minimum of 8% and the employer a minimum of 12% of the total earning of the employee’s monthly salary. The employee’s EPF balance continues to grow as they mature in their working environments. The cumulative balance in their EPF account, which is maintained by the Central Bank, is invested in Treasury bonds, Treasury bills, equity securities, corporate debt securities, and money market instruments.
Depending on the rate of return, an annual interest rate is declared and credited to employees’ accounts. Thus, an employee’s EPF contribution is invested in secured investments which grow annually, assuring an employee that they will be stable and able to provide protection for their family and loved ones in the latter part of life.
As at the end of 2020, the total value of the EPF was Rs. 2,814.4 billion and the fund had a total of 19 million members. The total contributions made by its members in 2020 were Rs. 150.5 million and the total refund value was Rs. 109.9 billion.
During 2019, the total investment income of the fund amounted to Rs. 259 billion, recording an increase of 16.5% over the previous year. Interest income was the major source of income of the fund and it grew by 11% to Rs. 254.7 billion in 2019 from Rs. 229.4 billion in 2018.
The dividend income realised from the equity portfolio increased by 60.7% to Rs. 6,247.5 million in 2019, compared to Rs. 3,887.6 million earned in 2018. Overall, return on investments of the fund recorded 10.7% in 2019 compared to 10.4% in 2018.
As at end-2019, the investment portfolio consisted of 93.8% in Government securities, 3% in equity, 1.7% in corporate debentures and trust certificates, 0.9% in fixed deposits, and the remaining 0.6% in reverse repurchase agreements.
Risk management
The Monetary Board (MB) of the CBSL, as the custodian of the fund, oversees the risk management of the EPF. Accordingly, the risk management activities of the EPF are also considered as an integral part of the risk governance structure of the CBSL, which focuses on both financial and non-financial risks pertaining to all its activities, including EPF activities.
The MB is the ultimate decision-making authority of the fund. It provides policy direction for the investment activities of the EPF and specifies the overall risk parameters, such as the risk appetite and risk tolerance levels within which the fund should be managed.
Further, the MB manages the respective activities through two high-level committees – the Board Risk Oversight Committee (BROC) and EPF Investment Oversight Committee (EIOC).
The BROC is responsible for overseeing the risk management function and the EIOC provides the highest level of oversight authority pertaining to the fund management activities. The role of the EIOC is to oversee the investment activities of the EPF by providing strategic and policy guidance for the management of the fund. Further, powers with respect to the day-to-day investment decision-making function of the EPF management activities have been delegated to the departmental level committee, the EPF Investment Committee (EIC).
The middle office of the Fund Management Division of the EPF oversees the daily operational risk aspects on a continuous basis as the first line of defence. Accordingly, both pre and post compliances of investment activities are monitored in line with the parameters provided in the Investment Policy Statement (IPS), Strategic Asset Allocation (SAA), and Investment Guidelines (IG).
The Risk Management Department (RMD) acts as the second line of defence and is responsible for providing the policy framework for the investment governance process through independent assessing, monitoring, and reporting on risks associated with the fund management activities of the EPF.
Accordingly, providing applicable policy directions and guidelines relating to investment activities are handled by RMD through revising and updating the IPS, SAA, and IG in line with updated market requirements, in order to improve the existing work procedures and to provide greater independence over the investment decision-making process while maintaining an adequate level of internal controls. As the third line of defence, the Internal Audit Department provides risk assurance with regard to the fund management function of EPF.
Further, a distinct mechanism is in place for escalation and addressing of non-financial risks related to the overall EPF Department’s activities through a separate committee, the Non-Financial Risk Management Committee (NFRMC). Accordingly, periodic reviews are conducted for identification and review of non-financial risks and to decide and monitor the risk mitigation actions thereon through the RMD of the CBSL.
Accountability
In spite of a well-managed system with the involvement of the country’s key financial institutions to protect the fund and to manage the risks, the EPF continues to incur billions of rupees in losses annually, mainly due to the irregularities of the fund management.
When contacted by The Sunday Morning, Verité Research Lead Economist Raj Prabu Rajakulendran confirmed that their research on EPF was based on a forensic audit report by an audit firm. He said all the statistics used for the research was based on the said forensic audit report.