Mandatory Savings and Retirement Adequacy: A Portfolio Simulation of EPF in Sri Lanka

1. Mandatory Savings and Retirement Adequacy: A Portfolio Simulation of EPF in Sri Lanka Wasana Karunarathne The University of Melbourne

2. Agenda • The Employees Provident Fund (EPF) • EPF’s Investment Performances • Empirical Findings • Does EPF Provide Sufficient Member Balances? • Member Balances under Different Portfolio Investments • Parametric Reform Options • Policy Recomendations Wasana Karunarathne

3. The EPF Scheme • EPF is implemented in 1958 • Major vehicle for private sector employees • Covers around 30% of the labour force (80% of the private sector employees) • Fully funded, defined contributory (DC) type • Centrally managed by the Central Bank of Sri Lanka on behalf of the government Wasana Karunarathne

4. EPF Scheme cont. • Contribution Rate: 20% of gross salary Mandatory for both employers (12%) and employees (8%) • Benefits: lump sum Payment • Retirement age: 55 years • Pre-retirement withdrawals: allowed for housing purposes Wasana Karunarathne

5. EPF Scheme cont. Figure 1: EPF Contributions and Savings, 1995-2002 Wasana Karunarathne

6. Investment Performance in brief • EPF investments are highly regulated and restricted to invest in government securities Wasana Karunarathne

7. Inv. Performance cont. Figure 2: EPF, Investment Allocation, 2002 Wasana Karunarathne

8. Inv. Performance cont. Figure 2: EPF, Real and Nominal rates Return, 1960-2002 Wasana Karunarathne

9. Empirical Findings: Does EPF provide adequate balances? The paper calculates The Capital Accumulation Ratio (CAR) Replacement Rate (RR) Next slide provides the results under the baseline scenario Wasana Karunarathne

10. Table1: Base Line Case: Capital Accumulation Ratio and Replacement Rate Average RR in real term: 30% Note: Replacement rates have been calculated using nominal discount rates Coefficient of variation is SD/ Mean and generally expressed as a percentage Wasana Karunarathne

11. Empirical Findings cont. Could the situation be changed, if EPF used diversified portfolios? Wasana Karunarathne

12. Table2: CAR under Diversified portfolio Investments Wasana Karunarathne

13. Empirical Findings cont. • Parametric Reform Options • Available Options • Reform the investment function • Increase retirement age • Increase contribution rate Wasana Karunarathne

14. Table2: CAR under Diversified portfolio Investments Wasana Karunarathne

15. Recommendations • Pension reforms should not be carried out in isolation. it should be an integrated part of overall economic reforms. • Issues relative to accumulation phase as well as decumulation phase should be addressed. • Political commitment and greater literacy required. Unnecessary government intervention on EPF activities should be minimized. Wasana Karunarathne

16. Recommendations • Enhance the professionalism of the management. • Improve the investment function. Diversify portfolios. Gradually de-link provident funds from budgetary financing • Limit pre-retirement withdrawals Wasana Karunarathne

17. Thank you! Contacts: Wasana Karunarathne Department of Economics University of Melbourne, Economics and Commerce Building Victoria, 3010, Australia Phone: 61 3 8344 5397 Email: lakminik@unimelb.edu.au I would like thank National University of Singapore for financial support provided for my PhD research. Wasana Karunarathne