EPF and retirement

The Budget proposal to change the retirement age from 55 to 60 years has drawn concern with the Ceylon Federation of Labour (CFL), which has warmed against the Government’s move to amend the Employees’ Provident Fund (EPF) Act. But given Sri Lanka’s rapidly-ageing population, is it possible for to use this opportunity to broad base retirement options for all? 

In a long missive the Federation has urged the Government to reconsider its proposal, pointing out that restricting people from accessing their EPF funds would adversely affect thousands of people, including women. The latter is important as Sri Lanka already has a disproportionately low number of women in the formal workforce and restricting them from accessing funds would disincentivise inclusion. For example, in the apparel industry many women stop work after they are married but use their EPF funds as cushions to start new businesses or support their families. Many also use EPF funds for medical purposes, marry off their children or build houses at different times during their career. 

The Federation has also touched on the management of the EPF, which has triggered controversy at different times, and backed removing it from under the purview of the Central Bank to create more independence and accountability to millions of workers. The Federation alleges that the main aim of changing the retirement age is to enable the Government to use the sizeable funds of the EPF for its own liquidity needs and not for the benefit of millions of workers. 

These and other points raised by CFL merit consideration from the Government. Even if the EPF Act were to remain unchanged its ability to support workers in retirement has been in decline over the years.

According to World Bank estimates, by 2030, one in every five Sri Lankans will be over the age of 60. In 2012, 13.2 million of the population were 15- to 59-year-olds. Of these, 7.6 million were economically active. However, only five million workers were eligible for pensions under various employment-based pension schemes. Of those, only 2.3 million workers were enrolled in a pension scheme. Even then all enrolled were not effectively covered.

Only the public sector pension scheme covers the total eligible population. This is also one reason why State employment is so sought-after but whether this pension keeps pace with inflation remains a concern.

The estimated coverage for other pension schemes fluctuates between 18% for the self-employed pension schemes to 64% for the farmers’ pension scheme. However, the effective coverage is estimated to be much less, possibly as little as 11% for the self-employed and 38% for farmers due to non-payment of dues in the contributory programs. Only an estimated 1.7 million were effectively covered by a pension scheme.

Unfortunately, all informal sector pension programs define benefits in nominal terms. The real value of these benefit amounts will be much less when the pensions are received. For example, the pension scheme for self-employed promises a Rs. 1,000 pension benefit at retirement. The real value of this benefit for a person aged 40 today will be Rs. 471, assuming 5% inflation.

It is therefore imperative that reforms are introduced to diversify pension schemes and bring in new products by the financial and insurance sectors, perhaps to even establish separate pension funds that operate transparently, so the reliance of senior citizens on interest rates is reduced.