Harim Peiris

Political and Reconciliation perspectives from Sri Lanka

  • June 2011
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The Private Sector Pension Proposal – An Analysis

Posted by harimpeiris on June 16, 2011

Roshen Chanaka, a twenty two year old free trade zone worker has already paid the supreme sacrifice in the defense of and in defiance against the proposal to tinker with the EPF and ETF systems in the form of a pension scheme for private sector workers. The large scale protests, the shooting dead of a young demonstrator, the strong protest by the German Ambassador of the police assault on workers inside German investor factories, the consequent early retirement of the Inspector General of Police, the incoherence of the minister concerned regarding the proposal, the mixed messages from various government spokespersons, the sudden presidential decision to exempt free trade zone workers from the scheme, the lack of public information on the proposal as a whole and the strong caution by employer groups with regards the same, makes the proposed private sector pension scheme the most relevant and dominant topic in the public policy arena and an essential issue that needs close examination in the public interest.

There have been some claims that the government has decided to drop the proposal. However, clearly this is not so. Government insiders indicate it is more in keeping with the old Marxist maxim of taking one step backwards to take two steps forward. The pension proposal in the face of fierce opposition is currently on the back burner, ready to be taken up and rushed through parliament as an urgent bill, no sooner the protests die down. However there are several areas of concern with regards the proposal and the process by which it sought to be implemented.

A non transparent and opaque process

Firstly the entire process of implementing such far reaching changes that impact the retirement savings of all those employed in the formal sector of the economy, baring public servants, has been shrouded in secrecy and developed with a complete lack of transparency. There has been no white paper published, no consultation with trade unions and business chambers. No academic or professional examination and exploration of the concepts or rationale behind the scheme and the modalities of implementing it. An issue as fundamental as reform of the retirement funds of the entire non state sector of the formal economy, at least warrants a parliamentary select committee process, none of which of course occurred.

Essentially cannibalizes the EPF and ETF

Given the lack of information on the proposal, it is hard to know specifics, but the responsibility for this lack of clarity has to rest with those who deliberately seek to be non transparent about significant national policy changes with far reaching implications for the welfare of a waste swathe of society. However the essential element of the scheme seems to be a cannibalization of the Employees Provident Fund (EPF) and the Employees Trust Fund (ETF). How the government touching these two funds is particularly insidious since government actually makes no contribution towards them. Neither the EPF nor the ETF is funded by tax money or government revenues. The employees themselves have their salaries deducted and together with a matching contribution from the employer, such monies are credited to the EPF while the ETF is solely a contribution by the employers. So essentially while the government manages the funds and indeed uses the same as a captive source of funds to subscribe to government borrowings in the form of treasury bills, the source of funds for the EPF and ETF are employer and employee contribution and receives no government assistance whatsoever. Accordingly it is particularly distressing when the government seeks to access and tap into funds that it makes no contribution to.

 Workers are really worse off

Currently under the EPF and ETF a private sector worker retiring, draws out his EPF and ETF in a lump sum upon retirement. The retiree pays a hefty one time flat rate tax on the lump sum and thereafter has the capital to do as he wishes. Many invest this in a fixed deposit for future income while those that have other sources of income use the lump sum for a capital expenditure item, such as completion of a home, a child’s higher education or other such high expenditure item. The most insidious part of the proposed scheme is that it seeks to essentially do away with the lump sum withdrawal by a retiree and replace the same with a monthly payment, limited to the amount of funds in the retiree’s respective account. Such an arrangement definitely makes the worker a lot worse off and should be avoided at all costs.

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