Most private companies will choose the 30% income tax rate for their pension funds avoiding Domestic Debt Optimisation (DDO) as paying a higher tax is highly beneficial for the pension funds and their members, Verité Research Executive Director Nishan de Mel said.
Speaking in an interview with TV Derana on Saturday (1 July), he said that based on the calculations made by Verité Research, going for the 30% income tax rate and avoiding the DDO is hugely beneficial for the pension funds and their members.
“I think most of the private companies will go for that option for their pension funds,” he added.
Therefore, he said that the Government should provide a similar opportunity for the members of the Employees’ Provident Fund (EFP) to decide on the path forward.
According to the DDO plan, the Treasury Bonds owned by Superannuation Funds will be exchanged against longer-term maturity Bonds, if the fund volunteers, with no principal haircut where the maturity of 12 instruments will be between 2027-2038.
Moreover, there will be a step-down coupon structure where 12% will be paid up until 2025 and 9% thereafter until maturity. Superannuation Funds that will not participate in the DDO will be subjected to a 30% income tax rate from the current 14%.
De Mel said that the average yield paid on the current Treasury Bond portfolio by the Government is at 13.52%, and the Government has decided to reduce this return paid to the bonds held by superannuation funds to 9.1%, which is a 1/3 reduction in the return.
He said that there will be a massive reduction in the amount received as returns on the bonds to the EPF and added that it will cause EPF to lose Rs.12 trillion in 16 years until 2038.
Further, he said that there is an issue of whether the part of the debt that is being restructured is enough to achieve debt sustainability.
He noted that pushing all the debt payments to between 2033-2038 will be a problem as people will notice problems that could arise in 2033 which will impact the economic growth.
“If the confidence in debt sustainability is not built up, that the debt is actually sustainable, then cutting 30% of external debt will not help,” he added.
He said that already domestic debt has gone through an effective haircut of about 35-40% due to inflation and when a 1/3 reduction in return to the EPF is added, there will be an overall hit of 70% to the savings of the general public.
De Mel said that if the external debt is cut by 50%, then there will be a reasonable cut on the domestic debt which will display comparable treatment. “There will be more confidence on the debt restructuring in the country which will create more opportunity (for the country's economy) to go forward,” he added.