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Sunday, 3 January 2016

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Government Gazette

Amalgamation of EPF and ETF:

Points to ponder

The proposal to amalgamate the EPF and the ETF has stirred a hornet's nest. It is a popular topic of discussion too, particularly among beneficiaries (members) of the EPF and ETF. However, it is appalling to find that most people who have an opinion on the topic are ignorant of some of the basic facts about the funds, and even worse have a completely wrong notion of the two funds.

Having been a former Chairman of the Employees' Trust Fund Board, I though it is perhaps not out of place to share my knowledge with the public, so that their arguments for or against the proposals could be based on a proper understanding of the two funds.

This is certainly not the first time such an amalgamation has been proposed, but all previous attempts simply fizzled out. At present, I do not have any strong views either for or against the proposal since I am not aware of the final proposal.

However, I believe that the proponents of the amalgamation have done their homework well and seem to be serious about it this time. First, it is important to understand the two funds, its similarities, differences and objectives.

The table summarises the details. It is useful to evaluate how the funds have performed in terms of dividends and interest declared to the members. In evaluating the two funds it must be borne in mind that the EPF makes refunds only once in the lifetime of the member while the ETF may make refunds several times during the lifetime of a member.

Investments

The returns also do not quantify the value of the benefits provided by the ETF. Therefore, the ETF return to members is slightly more than what is shown as dividend plus interest. The ETF paid 10% and EPF paid 10.5% during the past two years.

The lower figure of ETF is surprising since ETF returns were usually higher than EPF many years ago. One reason may be the high administration cost of ETF of around 5% of income. This is a good argument for amalgamation. In the case of ETF this includes the costs of enforcement but whether the Labour Department's enforcement cost is recovered from the EPF is not known.

The 2012 portfolio of both funds indicates that over 90% of its investments are in Government Bonds, Treasury Bills and Rupee Loans. The investment in the stock market is only around 5%. Therefore, members need not fear about the security of their money.

Even if the stock market crashes to zero the loss will be negligible. In good years, the gains from the stock market will be very useful. In fact during the 1990s we claimed that 1% of the ETF dividends to members that year came from the realised gains from the stock market. At that time there was no 'mark to market' mechanism, but only a provision for diminution of value based on market price. Otherwise with unrealised gains the benefit would have been even greater.

Although small, the investment in the stock market must be purely in the interest of the members and should not be used by the Government to control companies. In fact, in the 1990s the ETF had a policy of not taking up more than 10% of the issued capital of any company and not using its proxies for voting for or against any resolutions that would not be in the interest of its members.

The ETF Board of Directors, in the case of the ETF, and the Monetary Board, in the case of the EPF, are trustees of the funds; they don't own the funds. I understand that at one time the Investment Policy was thrown out at the ETF and even 100% of the share capital was bought. The EPF and ETF have Investment Policies now and Investment Committees which take responsibility for investment decisions.

Architect of the ETF

In the early 1990s, the ETF was under immense pressure to invest in a low interest debentures significantly lower than the prevailing Treasury Bill yield rate. The Board refused, resulting in the Chairman (myself) being asked to resign and the Board being given a 'telling off'. Later when the President realised that the Board acted in the best interests of the fund, I was re-instated.

The architect of the ETF is considered to be Lalith Athulathmudali who realised that 3% from the entire working population in the private and State corporation sector would be significant and could create large organisations, particularly for infrastructure, which needs large capital bases.

Colombo Drydocks Ltd (now Colombo Dockyard) and Lanka Cement were beneficiaries then. At that time, the market could not raise sufficient funds from the public for such large projects. Today, the situation is different and the ETF's role in contributing to capital is less significant.

Another declared objective of the ETF was "to promote employee participation in management through the acquisition of equity interest in enterprises". This caused a lot of anxiety in the private sector at that time and it was thought best to ignore this objective.

The reason for its inclusion was that employee participation at management and Board level was popular in some countries at the time. This concept is no longer in vogue. Therefore, another objective of the ETF is no longer relevant.

Whatever the new mechanism is, it should have a strong Board with representation by unions and the Employers Federation of Ceylon. It should resist unlawful directions from the Government. It should not be considered as a captive source of funds.

Once when I received a demand for funds from the Superintendent of Public Debt referring to the ETF as a captive source, I asked him to define a Captive Source. He answered, perhaps in lighter vein, saying a captive source is one where the Chairman would not dare to resist a direction from the Government.

Many years later I came to understand that the Government kept asking for funds at low interest and then asks the Board why the dividend is so low! Once the Minister in charge informed us that under a particular section he could give the Board special directions about investments. We consulted legal opinion and informed the Minister that what is meant by that section is not special directions about investments. Many years later the ETF was brought under the Ministry of Finance, and now under the Prime Minister.

The purpose of this article is to enable those who express opinions on the proposed amalgamation to do so with greater information. It is a pity that the latest published Annual Reports of the funds are still only of 2012. Annual reports must be published in time and must also be submitted to the National Labour Advisory Council.

The writer was Chairman of the Employees' Trust Fund Board from 1989 to 1994, and was later appointed to the Board by the Finance Ministry. He also served two terms as the Employers' Federation of Ceylon representative on the Board.

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