All countries need to address the social security of their subjects who need to be supported.
Social security is asserted in Article 22 of the Universal Declaration of Human Rights, stated as follows:
“Everyone, as a member of society, has the right to social security and is entitled to realisation, through national effort and international co-operation and in accordance with the organisation and resources of each State, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality.”
In the case of the welfare of workers many countries fulfil this requirement under schemes described by a term coined embracing the idea of creating systems pushing the people in designed directions to make their lives better, referred to as a kind of “paternalism”. It is basically a welfare measure. Pension schemes, retirement benefit schemes, compulsory savings schemes, social insurance schemes all come under this. Provident Funds fall into this category with mandatory contribution rates, withdrawal policies and enunciated benefits, offered without any flexibility of choice. Hence the term paternalism suits well to such schemes.
The decade, beginning 1950, has been “a memorable period” in the history of the birth of provident fund schemes in many countries of the world. In the Asian region they were started as contributory schemes with defined contributory rates as in Malaysia, Singapore and India while Sri Lanka established its EPF similar to those under Act No. 15 of 1958. Countries like Australia, China and Hong Kong gave mandatory status to provident fund schemes much later, Australia in 1983, China and Hong Kong in 1995.Over the years most of these EPF schemes have undergone changes towards meeting new social challenges with their changing economic landscapes and evolved into more advanced stages addressing the current needs.
Sri Lanka’s Employees Provident Fund has grown since, to a significantly huge fund with an asset base nearing Rs. 3,000 billion with over 18 million accounts and a membership of over 17 million covering employees in the private sector, State corporations and statutory boards. It operates under the purview of the Ministry of Labour with the Monetary Board of the Central Bank as the Trustee of the fund made responsible for its control and management. EPF is the fund with by far the largest asset base in the country today. The CBSL is in the process of streamlining procedures and systems to facilitate its services and processes.
Many advancements in provident funds have taken place in other countries with multiple changes towards the enhancement of member benefits, evolved systems to address the needs of the elderly and the vulnerable, as well as other policies aligned towards broad national objectives such as economic development.
An examination of the historical changes effected under the various amendments since the incorporation of Sri Lanka’s EPF Act, indicates that all those were to deal with the administrative regulations and the periodic increases to the mandatory contribution rates. No significant policy changes have been made to give effect to any improvements to the member benefits provided under the EPF.
Attempts to replace the EPF system by a contributory pension scheme during the 1990s were thwarted due to strong opposition from the trade unions. It was viewed as a disadvantageous move to the contributing members of the EPF. As a result the proposal put forward by the UNP Government in the form of a draft bill titled ‘Social Security Act’ was withdrawn.
The next move to extend the benefits of EPF to the members under a new scheme providing a lifelong pension in addition to the lump sum compulsory savings by the Mahinda Rajapaksa Government was also withdrawn due to strong opposition from some quarters of the organised working class.
The proposal was a definite improvement to the system which could have been easily further amended in consultation with the Government to avoid certain minor deficiencies observed. It is unfortunate that the proposal which encompassed an integrated and inclusive social security scheme was subjectively defeated due to conflicting political ideologies. To the independent observers that exercise to defeat the amendment appeared as a Luddite action by parties opposing anything good or bad due to their outrageous anathema.
In the context it would be useful to study the various developments and improvements effected to provident fund schemes in other countries. Let us examine this in relation to few Asian countries.
Contributory rates according to employer and employee:
India: 12%; 12%
Singapore: 12%; 9.5%
Malaysia: 13%; 11%
Sri Lanka: 12%’ 8%
- All contributions to the fund and accrued interest are exempted from income tax
- Death insurance benefits
- Option to withdraw prematurely for Housing and Home ownership plans
- Ensured higher investment returns
- Lifetime pension benefits to all members
- Medical assistance scheme associated with EPF contributions
- Ill health and old age benefits in addition to lump sum savings
- Special benefits to female members out of employment o/a of family care
- Housing and home ownership plans
- Early withdrawal plans for approved commitments
- Facilitation for investment in approved funds
- Guaranteed high returns to the fund on a monitored basis
- Employee contributions and interest incomes exempted from tax
- Early withdrawal opportunities under accepted schemes
- Pre-retirement and retirement withdrawals are tax free
- Life insurance coverage for all members
- Fund management and investment regulated under corporate governance measures
Provision of such benefits to enhance an otherwise compulsory savings scheme have brought about tremendous benefits to the members at no extra costs to the State. In most of the above instances the extra facilitations are managed within the limits of the contributions and the generation of incomes to the funds under guaranteed capital returns.
In Singapore the Provident Fund System, together with their unique social and political stability, has given the country a good start to develop its economy which assisted the transformation of Singapore from a poor Third World status to First World status in one generation. India has managed to offer a lifelong insurance scheme to all its members under the existing contributory framework by splitting the employer contribution of 12% as follows;
- EPF contribution: 3.67%
- Contribution towards pension scheme: 8.33%
Even the widow is entitled to a monthly pension of Rs. 1,000 after the death of the member receiving a pension.
All provident funds are faced with the question of facing challenges in managing their funds in a sustainable manner while ensuring;
- Adequacy of retirement savings
- Needs arising out of life expectancy and longevity issues
- Withdrawal of balances without affecting the feasibility
- Healthcare benefits during retirement
- Increasing the size of funds
- Aligning the fund policies to broad national objectives
Provident fund managers in Sri Lanka should address the following concerns to provide maximum benefits to the members while serving as a fund providing support to the country’s development efforts;
As a defined contributory scheme the fund has an obligation to maintain a one-to-one relationship with each individual member providing a platform for easy access to information.
A system which provide a personalised tracking to cover multiple instances such as change of employment, placement in different regions, etc. with less paperwork preferably tied up to the NIC number of the individual.
To expand the spectrum of member benefits both on a short-term and long-term basis.
To be able to set aside a part of the EPF savings to help the members to meet their own future medical expenditures or immediate family health needs for hospitalisation or surgery.
To assist those workers who are forced to leave employment due to ill health and accidental disabilities.
To extend the coverage of the fund to foreign workers, self-employed, domestic helpers, etc.
To review the scheme and apply an actuarially determined apportioning of contributions to establish a lifelong income support/pension scheme in addition to the lump sum withdrawal benefit currently provided.
Allow early withdrawals to facilitate the financing of purchasing/building or reducing house mortgages; education of members and members’ children; invest in approved trust funds and institutions.
Introduce death benefits to next of kin of deceased members.
Tax exemptions to member contributions as well as interest earnings from the fund.
Regulate the governance of the fund, appointment of the ETF board, board committees, investment panels, under corporate governance principles.
To bring all privately-managed funds now provided for in the provisions of the Act under a single statutory board.
Coupled with a national wage policy and a unification/consolidation of various terminal benefit schemes now in operation country wide, it would be possible to develop a uniform and equitable social security scheme for the common benefit of all employees incorporating an element of collective responsibility into the EPF scheme. Such a scheme will help the majority to share the fruits of success of pooling the resources.
The time has come to focus attention on the ETF as the country’s largest fund with the introduction of innovative asset-based policies to enhance benefits to the members while serving as a resource for the development of the country.