Funding retirement

Pension funds are essential for a country with a rapidly-ageing population but they also have to be well-managed to give members a sustainable income over a long period of time. Pensions are also a favourite election pledge of politicians and the latest to be rolled out is a pension scheme for migrant workers. 

Parliament recently approved Government proposals to establish a pension fund for migrant workers allowing for the extraction of Rs. 2 b from the Sri Lanka Bureau of Foreign Employment as the initial capital requirement.

The money is in the Kuwait Compensation Fund of the Sri Lanka Bureau of Foreign Employment and would be reallocated through amending the bureau Act.  The Legal Draftsman is to draft the Act for the proposed pension scheme, which is to be implemented from 1 January 2017. Undoubtedly the move deserves to be hailed because it provides a much-needed social net for thousands of migrant workers who, by remitting their hard earned foreign currency, assist to repay debt and fund Sri Lanka’s import dependent economy. 

The danger of pensions though is that they are, technically, part of Government debt because it is ultimately the State that is liable to meet payments and if pension funds are not managed in a transparent and competent manner the fiduciary responsibility can have serious results. Given Sri Lanka’s already high levels of debt pensions freely offered to farmers, fishermen, public workers and migrant workers by vote-hunting politicians tend to add up, ultimately putting massive responsibility on tax payers to fund rashly promised pension schemes.

What makes ad hoc pension schemes even more dangerous is that successive governments use pension funds for their own short term economic needs. The Employees Provident Fund (EPF) is an excellent example of this where, according to a study done by think tank Verite Research, the largest pension fund in the country at various times had to sell its shares in top blue chip companies to foreign investors to help the Government out of a Balance of Payment crisis in 2012 and was forced to make injudicious investments in loss-making State-Owned Enterprises such as SriLankan Airlines. In recent months the EPF has been embroiled in allegations of questionable bond market transactions in the secondary market that has led to a trading suspension as the Central Bank works to set up a more secure system.

In addition many millions of private sector workers are not only kept from making independent decisions regarding retirement investments, they are the ultimate payers of pensions for people who do not save. Under the current pay-as-you-go system employees often find that their retirement take home is far less than expected when they factor in inflation. A reliable pension fund should create higher returns so that retirees and their dependents can live comfortably. But the reality is retirement funds often get delayed, are inadequate and dependents are left vulnerable.

Sri Lankans are living longer than ever before so a pension scheme would have to conceivably fund each retiree for about 20 years or longer. With rising health and other costs as well as the sheer numbers that pension funds would have to cover clearly calls for a rethink of Sri Lanka’s pension commitments to a model that is more transparent, varied and above all sustainable.