EPF track record commendable – EPF Superintendent

The EPF has been earning above-average profits in the recent past, but unfortunately, there has been grossly unfair criticism and outrageous allegations made by certain parties against the EPF, said Nihal Rodrigo, Superintendent, EPF.

“The EPF is, by far, the biggest profit earning entity in the country,” he said.

However people are made to believe otherwise. “Therefore a detailed analysis seems to be warranted.”

“For instance, over the past five years from 2009 -2013, the EPF has earned a profit of Rs. 558 billion. There is no other entity with a comparable asset base earning such an enormous profit in the country.

In absolute terms, EPF has made profits of Rs. 101.7 billion in 2009, Rs. 111.5 billion in 2010, Rs. 107.5 billion in 2011, Rs. 111.8 billion in 2012 and Rs. 125.6 billion in the year 2013.”

As far as rates of returns are concerned, EPF has declared impressive rates of return of 13.75 percent in 2009, 12.5 percent in 2010, 11.5 percent in 2011, 11.5 percent in 2012 and 11 percent in 2013 out of profits earned by the Fund. Such rates of return were substantially above the interest rates applicable to normal deposits in the financial market during the periods.

Therefore, it is clear that the allegations against the EPF are baseless, and are obviously motivated by dubious intentions.

Stock prices

“Some persons have specifically claimed that the EPF has incurred losses amounting to over Rs. 11 billion in 2011 due to investments made in the stock market. There is absolutely no truth in such a claim and is an erroneous and misleading allegation, since the 'losses' highlighted are not realised losses, but unrealised reductions in value of investments.

In fact, the EPF has not incurred any realised losses at all in stock market operations, but has earned realised gains of Rs. 714million in 2011, Rs. 1,020 million in 2012 and Rs. 113 million in 2013,” he said.

As people knowledgeable in stock market operations well know, when a person invests in the stock market or in the equity of corporates, the stock prices may move up and down from time to time. It is an inherent feature of any market.

Hence, if shares purchased in the past are revalued at a time when market prices have declined, there would be a fall in the value of the investment. But it is not an actual loss. An actual loss would materialise only if those shares are sold at such depressed prices. If shares are not disposed at the reduced prices, the reduction in value arising from such revaluations is described as 'unrealised losses'.

“At the same time, if shares purchased in the past are revalued at a time when market prices have increased, there would be a gain in the value of the investments. But that too, is not an actual profit. An actual profit would be earned and realised, only if those hares are sold at such increased prices. If shares are not disposed at the increased prices, the increase in value arising from such revaluations is described as 'unrealised gains'.

Profits

The EPF invests in the stock market with a long term focus, and not with a short term perspective. Therefore, unrealised gains or losses arising from short term fluctuations in prices do not affect the profits of EPF. The reason for this outcome is that the EPF does not have any financial difficulties nor does it have any urgency to sell any shares at a loss.

This is because of the fact that EPF has more than adequate funds to meet its day-to-day obligations and to make refunds to members and other payments, and its average daily inflows are far greater than that of its average daily outflows.

Ony the funds remaining after meeting all obligations is invested. Therefore, the EPF will not need to dispose of its investments at a loss to raise funds for daily operations.

The amount of unrealised gains and losses changes from time to time. For instance, the net unrealised gain as at December 31, 2010 was nearly Rs. 18 billion. However, at that time, today's vociferous political critics were deafeningly silent and did not acknowledge the massive unrealised gains appearing in the books of the EPF.

Just because the EPF had such large unrealised gains at that time, it did not dispose of all its investments to realise capital gains, because EPF is a long term investor. It is only if the investment managers of the EPF are satisfied that the unrealised gains are substantial and they believe it is the right time to sell, that they will sell such shares and realise the profits.

With the down-turn in the share market, the net unrealised gain of nearly Rs. 18 billion at the end 2010, gradually moved into negative territory, and turned into a net unrealised loss of about Rs. 9 billion by the end of 2013. However, by April 22, 2014, the net unrealised loss had reduced to about Rs. 4.4 billion and by May 2, 2014, it has come down further to about Rs. 2.9 billion.

Returns

With the recent upturn in the stock market, it is likely that the net 'unrealised loss' that have been made use of by some persons to discredit the EPF, will turn into a net unrealised gain in the near future, thus causing deep embarrassment to these elements.

It must also be clearly understood that these unrealised losses do not affect the returns paid to members.

In fact, when there were large net unrealised gains, it did not result in an additional return being credited to members. In the same way, when there are net unrealised losses, it will not adversely affect the returns to be credited to the members. Only actual realised gains or realised losses are considered when arriving at profits or losses of the EPF.

Another claim that is sometimes made is that if EPF had not invested in the stock market, it would not have been subjected to this sort of losses.

“In that regard, it must be stated, that these claims too, are without a rational basis. The stock market is an alternative avenue available for investment, in addition to government securities.”

When investors invest in the stock market, they always do so on the basis that diversification is a fundamental principle of portfolio management. That means investing in different types of assets and not 'putting all their eggs in one basket'. There is a high risk if a person invests only in one or two assets or asset classes.

That is known to every investor. With the fiscal consolidation planned by the government where the budget deficits are being reduced gradually to below 4% of GDP, the need for government borrowings is also gradually reducing.

As a result, the EPF has to find new investment avenues to invest its funds. This is another reason for the EPF to explore new investment avenues. Not only for the EPF, but for pension funds all over the world, stocks are a major asset class for investment purposes.

Therefore, because of some politically motivated allegations and criticisms, if the EPF refrains from diversifying into different asset classes, the risks could be much greater in the future for its members, and that would be detrimental in the long term.

Another criticism that has been levelled against the EPF is that its investment activities have been carried out arbitrarily and have been not in line with best investment practices.

In this connection, it must be stated that in terms of the provisions of the EPF Act, the Commissioner of Labour is vested with the decisions pertaining to the administration of the Fund, while the Monetary Board of the Central Bank of Sri Lanka, as the custodian of the Fund, is empowered to make decisions relating to investment activities.

Rules

Accordingly, investments are made, based on a set of guidelines and policies, which are from time to time, updated and approved by the Monetary Board.

The Fund has a set of rules, guidelines and an organisational structure to undertake investment activities.

There is no room for making arbitrary investments since there is laid down procedure for making investments, and conducting the investment operations of the Fund. For instance, new investments, proposals and observations made by fund managers have to be submitted to the Investment Committee (IC) appointed by the Monetary Board for evaluation and analysis.

The responsibility of the IC is to make recommendations to the Monetary Board. Thereafter, having considered the recommendations, the Monetary Board, takes a final decision on such investments. Moreover, prior approval has to be obtained from the Monetary Board for the investments planned for the following month.

Investment activities of the Fund are performed by a team of well-trained officers who possess the necessary educational and professional qualifications. At the same time, the EPF takes many factors into consideration when stock market investments are carried out.

These include the intrinsic value of stocks and their future prospects, possible rise in value of stocks in the medium to long term, organisational structures and future plans of companies, the number of stocks in issue of such companies, viability and growth potential of the relevant industry and possible impact of the emerging economic activities on the company.

Financial statements

In the recent past, there have also been allegations that the EPF financial statements have not prepared and issued in time. This claim is also not correct. The EPF has prepared all financial statements of every year on time, and submitted such financial statements to the Auditor General and the Minister of Labour within the first two months and three months, of the following year. The highlights of the financial statements have also been published in newspapers within the first six months of the following year.

Accordingly, the financial statements up to 2013 have already been submitted to the Auditor General. Once the Auditor General hands over the audited financial statements after completing the audit of such statements, it is submitted to the Minister of Labour to be tabled in the Parliament.

The process of submitting financial statements to Parliament may sometimes take longer than anticipated due to legislature procedures. However, it must also be stated that all members of the Fund have received their member balances within six months of the end of the financial year and on that basis if, as alleged, the financial statements were not prepared on time, the Fund would not have been able to send half yearly individual statements to all active members.

Management fee

The EPF has been able to maintain its operational costs at less than 1 percent of the Fund value, which is by far, one of the lowest cost ratios in the world. In 2013, this was only 0.9 percent. This is a good outcome in comparison to the costs incurred by similar funds in other parts of the world.

Generally, a management fee of about a 2 to 3 percent is charged by private fund managers, for the management of a Fund, but the EPF has managed its funds at less than 1 percent, even while out-performing the others, and distributing the benefits among its members.

Further, when one is referring to the returns of the fund, the total returns of the fund must be considered, without dissecting the individual items in a large portfolio, on a selective or piece-meal basis. In that context, it must be appreciated that what matters in the final analysis is as to whether EPF was able to earn a high rate of return for its members, relative to other similar funds.

Accordingly, it is abundantly clear that the trust placed in the Monetary Board of the Central Bank by the EPF Act has been well-founded in the past, and will be preserved in the future too.

Fundamental Rights action was filed against the EPF in 2012 by several politically motivated persons and others, alleging impropriety relating to EPF's investments in the stock market. But, as is well known, after a preliminary hearing, the Supreme Court dismissed the petition without even granting leave to proceed.

“The EPF wishes to inform the public, and especially its members, that vituperative and well-planned allegations and actions against the EPF are without foundation and, therefore, the members must not to be misled by these politically motivated claims," Rodrigo said.

"At the same time, it must be stated that instead of leveling criticisms against the EPF, it should be commended for being able to earn a consistently high rate of return for its members,” he said.

-SS