EPF reforms by Employers’ Federation: A Trojan Horse masking corporate capture

The public’s life savings must not be used as a playground for private sector exploitation, no matter how much external pressure applied by the IMF or renegade ILO. The Government must reject this shift towards oligarchic control and instead demand structural accountability within a unified, transparent State custody framework where the regulators finally have everything to lose

The ongoing debate surrounding the governance of Sri Lanka’s Employees’ Provident Fund (EPF) has reached a critical juncture. For decades, the multi-trillion-rupee fund, representing the life savings of millions of private and some Government sector workers, has been treated as a captive market, routinely manipulated to absorb low-yielding Government Bonds unloaded by both the Central Bank of Sri Lanka (CBSL) and private sector primary dealers, while simultaneously serving as a sponge to absorb corporate losses by dumping over-priced shares through stock market purchases. 

In response to these chronic State-led failures, corporate advocacy groups, most notably the Employers’ Federation of Ceylon (EFC), have mounted a fresh legislative assault. As highlighted by recent developments, the EFC has officially submitted proposals to the Government outlining sweeping governance overhauls for both the EPF and the Employees’ Trust Fund (ETF). Their blueprint outlines removing the management of the EPF from the CBSL and transferring it to an independent tripartite trustee board represented by employers, employees and Government while simultaneously expanding fund’s mandate to invest aggressively in the private sector. Government has approved the appointment of a committee to study the feasibility of this framework, broadly signalling agreement. While framed as a modern, market driven solution to liberate workers’ savings from political interference, a closer analysis reveals that this proposal is intended to raise corporate profits, disguised as a mandate serving public interest. Far from solving the systemic vulnerabilities of the EPF, the EFC’s plan merely shifts the venue of exploitation, substituting State-led incompetence with oligarchic, corporate capture. 

EFC exploiting the crisis as a cloak of legitimacy

The timing of this corporate offensive is by no means coincidental. The EFC is deliberately leveraging the backdrop of Sri Lanka’s severe economic crisis erupted in 2022, alongside the public’s deep, justified resentment towards systemic State corruption, to advance its own agenda. By weaponising the narrative of Government mismanagement and the domestic debt restructuring (DDR) that disproportionately hit retirement savers, corporate elites are positioning themselves as competent, benevolent saviours of the EPF. 

However, beneath this apparently generous and reasonable rhetoric lies a more cynical motive. Amidst ongoing macroeconomic stagnation, high inflation, and suppressed consumer demand, the private sector’s own profit margins are facing stagnation, uncertainty and decline. Stripped of traditional avenues for growth, corporate conglomerates are looking at the multi-trillion-rupee pool of the EPF —which amounts to over 15% of country’s GDP— not with fiduciary concern, but with predatory motives. 

The EFC’s program behaves as a classic Trojan Horse; it uses the ongoing economic crisis, the EPF governance issues under the CBSL, and uncertainty within the private sector itself, as a cloak of legitimacy, masking an aggressive campaign to encroach upon public savings as a desperate remedy for their own expected decline in profitability.           

Principal-Agent problem recreated under EFC

To understand why the EFC’s proposal is inherently flawed, one must examine the core structural defect plaguing the EPF: the principal-agent problem (see https://www.ft.lk/columns/The-EPF-under-CBSL-custody-Fixing-the-principal-agent-problem/4-793150). This dilemma arises when an “agent” (the entity managing the money) has incentives that do not align with the interests of the “principal” (the workers who own the money). Under the current framework, the EPF suffers from a profound principal-agent crisis because its own staff retirement assets are securely insulated within an exclusive, independent Staff Provident Fund (SPF). Because Central Bankers don’t have their own “skin in the game”, they face zero personal financial consequences when the public EPF suffers from political bond scams or poor yield management. 

The EFC argues that a private-sector-led board would eliminate this misalignment by introducing commercial prudence. This argument however, rests on a dangerous fallacy. Moving asset management from a State bureaucrat to a corporate elite does not magically dissolve the principal-agent problem; it simply introduces a new, highly incentivised agent with its own agenda. A board comprised of private employers and financial elites, despite the presence of Government officials, remains an agent managing other people’s mandatory savings. Crucially, these corporate agents would lack the primary mechanism that keep the private sector on its toes under limited conditions: market competition in the absence of externalities, public goods, and information asymmetry.

Information asymmetry and front-running threat

In a standard commercial environment, asset managers (to a certain extent) are disciplined by the threat of capital flight. If a private fund performs poorly, clients pull their money out and go to a competitor. But the EPF is a legally mandated, closed-loop retirement scheme. Workers cannot opt out, choose an alternative fund, or withdraw their savings at will. Consequently, an independent corporate board managing the EPF would operate with absolute impunity. They would face no competitive pressure, no threat of bank run, and no market accountability. This lack of disciplinary pressure creates an extreme Moral Hazard. It positions a multi-trillion-rupee pool of un-withdrawable public cash directly in front of the very corporate elites who are constantly seeking cheap capital to cushion their own enterprises during downturns. 

Beyond the direct temptation of misallocating capital, the EFC’s proposal creates an even more insidious avenue for corporate malpractice: privileged access to market moving information. If representatives from the Employers Federation sit on the fund’s management board, they will possess advanced, asymmetric knowledge of exactly where and when the multi-trillion-rupee fund will be deployed in the private market. Because the EPF is an institutional behemoth, its sudden entry into any specific corporate equity or debt instrument inevitably drives prices up. 

With this insider visibility, corporate elites n the board would have the perfect opportunity to engage in “front running”. Board members, or their affiliated corporate networks, could quietly purchase assets ahead of time through their private entities, waiting for the massive weight of the EPF’s capital to artificially inflate the asset’s price, before selling for a guaranteed, risk-free profit. In this scenario, the market intelligence created by the fund’s sheer size is weaponised for private gain rather than being held in strict fiduciary trust. The resulting inflation of purchase prices would mean the EPF pays a premium for its investments, systematically diluting and reducing the overall returns for ordinary workers. The fundamental rule of fiduciary duty dictates that the valuable information generated by the fund’s investment operations must be used solely for the economic benefit of the fund itself, never as a proprietary trading advantage for a select group of corporate insiders.

Myth of private sector salvaging

This brings us to the third and more alarming pillar of the Employers’ Federation’s ambition: expanding EPF investments to the private sector. Proponents argue that the private equity and debt markets offer higher yields than inflation-ravaged Government securities. While appealing, this narrative entirely ignores the rent-seeking nature and the historical track record of Sri Lanka’s financial elite. 

The proposed tripartite body including employees and Government representatives will be exploited by the employers’ representatives as a mechanism providing legitimacy for corporate rent-seeking under conditions of information asymmetry and absence of market competition, rather than acting as a shield to repel its adverse effects. The public’s memory remains scarred by systemic corruption where the public EPF was exploited to fuel “pump and dump” schemes on the Colombo Stock Exchange. In those instances, rogue financiers and corporate insiders used the EPF to nationalise private losses and reaping historic gains at the expense of the ordinary workers. 

Handing day-to-day asset allocation over to a board intertwined with the Employer’s Federation would institutionalise this exact conflict of interest. The board would be constantly tempted to use the public fund as a cheap credit facility or equity cushion for private corporate enterprises and the tripartite body will become a cover providing legitimacy for this behaviour while the workers’ and Government representatives in the fund’s management will remain defenceless. 

Irony of global complicity

The danger of this proposal is compounded by the powerful international alliances which the EFC is leveraging. To shield its self-serving agenda from public backlash, corporate interests have strategically aligned their lobbying efforts with broader mandates and recommendations pushed by the International Monetary Fund (IMF) and the International Labour Organisation (ILO). Under the banner of restructuring and good governance these global entities have paved the path for “reforms” that favour private exploitation of superannuation funds. The IMF an institution allegedly tasked with economic stabilisation continues to champion neoliberal structural adjustments that compromise social safety nets, exposing workers’ life savings to the volatile and predatory whims of private exploitation. Even more egregious is the complicity of the ILO. An organisation founded on the global mandate of social justice and protecting labour rights has effectively greenlit a framework that strips workers of financial security. By recommending or lending institutional legitimacy to reforms that weaken public custody and introduce massive corporate conflicts of interest, the ILO is betraying its foundational principles. 

Public solution

True reform does not abandon State custody to enrich a private financial cartel, nor does it lie in bowing to tone-deaf directives from Washington and Geneva; it lies at enforcing institutional alignment through domestic legislative reform. Instead of privatising control and introducing front-running vulnerabilities, the systemic solution to the EPF’s woes is to force the current regulators to share the destiny of the people they serve. If the exclusive CBSL Staff Provident Fund was legally merged into the general public EPF by amending the 2023 CBSL Act, the principal-agent problem would evaporate completely, forcing the “agent” to become a “principal”.

Under a merged fund, CBSL officers, asset managers and trade unions would fight fiercely against political manipulation, front-running, and artificially suppressed yields out of pure financial preservation. This alignment would provide yields to the public much greater than what could be expected under a tripartite body intertwined with the Employers’ Federation. The CBSL staff’s own retirement security would be bound to the exact same ledger as the tea estate worker and the factory labourer. Because the CBSL would still function under strict statutory public mandates, it would lack the personal profit motive to front-run its own investments ensuring that all market power and informational value generated by the fund remain consolidated entirely for the workers’ benefit. 

The EFC’s proposal is a Trojan Horse that mistakes private exploitation for good governance and accountability.  In a captive, mandatory fund like the EPF, private management without market exit mechanisms is a recipe for corporate rent-seeking and insider trading. The public’s life savings must not be used as a playground for private sector exploitation, no matter how much external pressure applied by the IMF or renegade ILO. The Government must reject this shift towards oligarchic control and instead demand structural accountability within a unified, transparent State custody framework where the regulators finally have everything to lose.