Sri Lanka EPF suffers billions in real losses

Sri Lanka's main private sector retirement fund has made billions real losses in in 2007 as the state used the monetary system to inflate away debt at the expense of the private sector workers in the country, the latest data shows.

In 2007, Sri Lanka's main private sector retirement fund, the Employees Provident Fund (EPF) lost 23 billion rupees in real terms as inflation shot up and interest rates lagged behind.

Inflation measured by the Colombo Consumer Price Index (CCPI) was 16.5 percent in 2007, against an effective rate of return declared to members of the EPF of 11.40 percent indicating a real loss of 5.00 percent for the year, according to information disclosed in the 2007 annual report of the Central Bank, which manages the fund.



Even conservatively taking the beginning-of-the-year balance of the fund portfolio of 477.6 billion rupees, the EPF has lost 23.8 billion rupees in real terms with an effective rate declared of 11.4 percent in 2007.

The EPF is made up by contributions deducted from the salaries of private sector workers and the bulk of the funds are invested in government securities.

Debt market participants routinely refer to the fund as a 'captive' source indicating that it is mis-used by the state to keep rates down against the interests of its own beneficiaries.

The International Monetary Fund has already called for independent governance for the EPF. The ETF, another private sector retirement fund, is also managed by the state.

Critics have pointed out that the Central Bank is faced with conflicts of interest in managing the EPF.

On one hand it is responsible for containing inflation and has the power to decide interest rates. It also runs the public debt department which raises money for the government and has a responsibility to find money at the lowest rates.

The EPF on the other hand has to get the highest rates for its members. These goals are incompatible with each other.

In a Financial Sector Stability Assessment, the IMF said a "sound, robust, and independent governance structure" was needed for the EPF with a "clear objective of seeking the best investment returns for members."

Critics have also pointed out that the managers of the EPF who are central bank employees have inflation protected pensions which are topped up each year with billions of rupees from central bank funds.

The rate of return declared for members of the Central Bank provident funds were not disclosed in the annual report.

The EPF on the other hand is taxed. This year the fund paid 4.4 billion rupees in taxes.

Last year another controversy blew up after it was revealed that trained fund mangers and analysts who were recruited to help improve returns had been effectively sacked due to internal employment politics within the monetary authority.

In 2007 however the monetary authority allowed market rates to move up which analysts say will help increase returns to the EPF in the future. In 2006 the fund lost 37 billion rupees in real terms when compared to the CCPI index.

Countries with fiat (paper) money can use the monetary system to print money and drive up inflation while keeping interest rates low or negative in real terms.

This reduces the real debt burden of the government at the expense of savers, especially older people who have saved for a lifetime.

Most ordinary people who find savings of a lifetime destroyed by inflation, or the loss of purchasing power of fiat paper currency, find the concept of real losses difficult to grasp, allowing governments to create inflation through central banking without attracting serious criticism.

Fiat money and central banking has been mis-used spectacularly in monetary history, in well documented cases, especially in France both during the French revolution and in the early part of the 18th century when John Law created a paper money central bank.

But central banking came to be widely abused as a method of 'secret taxation' to finance governments only after the United States went off the gold standard after World War II.

The current sub-prime bubble is also blamed on loose monetary policy of the Federal Reserve.

Source: LBO