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By Ravi Ladduwahetty

The Government plans to create private sector Pension Funds that will channel large funds to productive enterprises and increase returns for pensioners.

This will bring some Rs. 863 billion into the financial market to help jumpstart the economy.

Pension Funds have currently aggregated to Rs. 863 billion comprising Rs. 580 billion from the Public Sector Pensions Scheme (PSPS), Rs .280 billion from the Employees Provident Fund (EPF) and Rs. 3 billion from the Employees Trust Fund (ETF).

The Ministry of Labour and Employment will be involved in the administration of the Pension Funds while the Finance Ministry will be involved in the decision making process about the regulation of these Funds.

Labour and Employment Minister Mahinda Samarasinghe told the Daily News in an interview yesterday that the new reforms were mandatory in the light of relatively low returns that pensioners were drawing now and not in conformity with market rates and where the funds could be used to accelerated private sector led growth , in contrast to the hitherto practice of investing in Government Securities.

He said that these reforms will also be significant in that 60 percent of the population will be reaching the age of 60 by 2020 and these funds should be available for them with adequate returns by that time in order to yield higher returns as the Government will not be able to provide for them .

The Labour and Employment Ministry has been empowered by the Government to proceed with the drafting and implementation of the reforms as it is the only Government agency which has a relationship between the Government, the employer and the employee.

Today, the EPF has over 1.9 million members and assets worth Rs. 280 billion. Almost 98 percent of these assets are in Government Securities. Successive Governments have resorted to using these captive sources of funds for deficit financing of mostly recurrent expenditure, which means that there is nothing to justify it. This, in turn, has reflected extremely poor returns that the EPF in the last 30 years, the Minister said.

The Government is currently studying the role models operating in other countries towards this program and is in consultation with international experts.

The Government is also studying the model of Pinnero, the famous Chilean expert on Pension Reforms, Minister Samarasinghe said. The Government will also set up an office for the implementation of these reforms next month, according to the Minister.

Today's workers should have an environment for retirement and the Pension Reforms program initiated by the Government will give them greater independence, dignity of life and security in their retirement.

The present formal pension schemes and funds, however inadequate, only cover 50 percent of the working population which means that there is another 50 percent of the population which has no retirement security at all.

Such a high ratio cannot continue much longer. If left unattended, will lead to huge social problems in the future and now this is an opportune problem to address this issue.

Commenting on the progress of the Employees Trust Fund, the Minister said that the ETF was set up with a mandate to finance private sector development, which lived up to the mandate in the initial years.

However, the system fell victim to politicisation of the decision making process and many questionable investments were made which have not yet made a favourable return. The ETF has also made some investments in Government Securities and the track record is worse than that of the EPF.

Meanwhile, the Committee on Pension Reforms which comes under the aegis of the Financial Sector Reforms Committee (FSRC)) and chaired by Advisor to the Prime Minister on Policy Planning R. Paskaralingam has decided to fast track the pension reforms in consultation with all the stakeholders associated with pensions.

Securities and Exchange Commission (SEC) Chairman Michael Mack welcomed the reforms. He said: " There is definitely a need for reforms which should be regulated in such a manner which will facilitate the creation of new pension funds from institutional investors.

This will also improve the performances of the Colombo Stock Exchange (CSE) and also the corporate debt market. The market is being dominated by private individuals and funds and therefore, there is a lack of liquidity."

The SEC Chief also said that the inclusion of the Pension Funds in the Colombo bourse will also drastically cut down the volatility of the Colombo bourse because long term private fund institutions will be injecting funds to the Bourse.

However, these funds should be regulated in such a manner that the pensioners get returns keeping pace with inflation, unlike in the past, he said.

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