In terms of Section 5 (1) e. of the EPF Act, Monetary Board may invest such of the moneys of the Fund as are not immediately required for the purposes of this Act in such securities as the Board may consider fit and may sell such securities. Accordingly, on behalf of the Monetary Board, EPF Department of the Central Bank of Sri Lanka manages EPF funds with the view of providing maximum retirement benefits to members through prudent and innovative management of the fund.
The investment policy of the Fund continued its focus on providing a long–term ‘positive real rate’ of return to the members while ensuring the safety of the Fund and maintaining a sufficient level of liquidity to meet refund payments and other expenses of the Fund. The total investment portfolio (book value) of the Fund grew by 10.9 per cent to Rs. 2,548.7 billion as at end 2019 from Rs. 2,298.8 billion recorded as end 2018 (Table 1).
Table 1: Investment Portfolio
|Type of Investment||End 2018||End 2019|
|Amount(Rs.bn.)||Share (%)||Amount (Rs.bn.)||Share (%)|
|Treasury Bonds & Bills||2,119.2||92.2||2,390.4||93.8|
During 2019, the total investment income of the Fund amounted to Rs. 259.0 billion, recording an increase of 16.5 per cent over the previous year(Table 2). Interest income was the major source of income to the Fund and it grew by 11.0 per cent to Rs. 254.7 billion in 2019 from Rs. 229.4 billion in 2018. The dividend income realised from equity portfolio increased by 60.7 per cent to Rs. 6,247.5 million in 2019, compared to Rs. 3,887.6 million earned in 2018. Overall, return on investments of the Fund recorded 10.7 per cent in 2019 compared to 10.4 per cent recorded in 2018.
Table 2: Income on Investments
|Source of Income||2018||2019|
|Amount(Rs.mn)||Share (%)||Amount (Rs.mn)||Share (%)|
|Interest with amortization gains||229,446.0||103.1||254,681.0||98.3|
|Marked to market gain/loss from Equity||(10,901.3)||(4.9)||(1,890.0)||(0.7)|
|Capital gains from Equity||7.2||–||–||–|
|Capital gains from Government Securities||–||–||0.1||–|
|Impairment of Financial Assets||0.6||–||0.3||–|
As at end 2019, the investment portfolio consisted of 93.8 per cent in government securities, 3.0 per cent in equity, 1.7 per cent in corporate debentures and trust certificates, 0.9 per cent in fixed deposits and the remaining 0.6 per cent in reverse repurchase agreements. The maturity profile of the government securities portfolio together with yield rates as at end 2019 is given in Table 3.
Table 3: Maturity Profile of Government Securities Portfolio
|Maturity||Maturity Value amount (Rs.Mn.)||Share (%)||Weighted Average Yield (%)|
|Less than 1 year||117,804.5||4.9||7.96|
|More than 5 years||1,804,331.7||75.5||10.09|
Overall Return of the Fund
The Fund earned a total gross income of Rs. 259.3 billion in 2019, recording an increase of 16.4 per cent compared to the previous year (Table 4). After adjusting for operating expenditure and tax expenditure, the net profit for the year 2019 was Rs. 222.8 billion which is an increase of 16.9 per cent compared to that of 2018. The EPF was able to earn a 10.7 per cent Return on Average Investment in 2019 while maintaining operating expenses to a gross income ratio of 0.6 per cent in 2019. With the introduction of the new Inland Revenue Act, No.24 of 2017, which was effective from 01 April 2018, the income tax rate applicable for the Fund increased from 10 per cent to 14 per cent, which resulted in an increase of Rs. 4.2 billion in the tax expenditure when compared with the previous year. Furthermore, the Withholding Tax (WHT) of 10.0 per cent paid on Treasury bond interest income which had been recognised as part of gross income under the previous tax regulations has been abolished with effect from 01 April 2018. Also, the adoption of SLFRS 09, the Accounting Standard applicable for classification and measurement of Financial Instruments, where listed equity instruments are measured at a fair value and under the prevailed market conditions, a marked to market loss of Rs. 1.9 billion was charged against the profit for the year 2019. Accordingly, the EPF has taken measures to declare an interest rate of 9.25 per cent on member balances in 2019 after transferring Rs. 7.7 billion to the Profit Equalization Reserve.
Table 4: Five Year Summary of Key Performance of EPF
|Interest and Amortization gains||169,645.90||193,656.31||219,635.33||229,446.03||254,681.0|
|Realized Capital Gains / (Loss)||1,724.31||1,063.97||–||7.22||0.1|
|Net gain / (loss) from FS at FVTPL||(394.00)||(842.11)||1,476.85||(10,901.29)||(1,890.0)|
|Impairment of Financial Assets||(2,956.64)||(5,231.64)||(1,502.11)||(0.59)||0.3|
|Total Gross Income||171,855.30||193,071.40||223,192.48||222,843.10||259,322.7|
|Profit for the Year||156,937.28||175,926.97||202,946.76||190,617.40||222,776.4|
|Retained Profit b/f||311.30||215.58||189.34||2,470.95||159.5|
|Capital Gain on Disposal of Unlisted Equity||–||–||–||–||90.0|
|Profit available for distribution||157,248.57||176,142.54||203,136.10||193,088.35||223,025.8|
|Return on Investment(%)||11.28||11.43||11.8||10.4||10.7|
|Interest Rate (%)||10.50||10.50||10.50||9.50||9.25|
Governance Framework for Risk Management of Employees’ Provident Fund
The Monetary Board (MB) of the CBSL as the custodian of the Fund is overseeing the risk management of the EPF. Accordingly, the risk management activities of EPF are also considered as an integral part of the Risk Governance structure of the CBSL which focuses on both financial and non-financial risks pertaining to all its activities including EPF’s activities. MB is the ultimate decision making authority of the fund management activities of the EPF. It provides policy direction for the investment activities of the EPF fund and specifying the overall risk parameters, such as the risk appetite and risk tolerance levels within which the fund should be managed. Further, the MB is managing the respective activities through two high-level committees namely, Board Risk Oversight Committee (BROC) and EPF Investment Oversight Committee (EIOC) in order to strengthen the governance of the risk management structure the EPF.
The BROC is responsible for overseeing the risk management function and the EIOC provides the highest level of oversight authority pertaining to the fund management activities. The role of the EIOC is to oversee the investment activities of the EPF by providing strategic and policy guidance for the management of the fund. Further, powers with respect to the day-to-day investment decision-making function of the EPF fund management activities have been delegated to the departmental level committee, the EPF Investment Committee (EIC). The Middle Office of the Fund Management Division of EPF oversee the daily operational risk aspects on a continuous basis as the First Line of Defense. Accordingly, both pre and post compliances of investment activities are monitored in line with the parameters provided in Investment Policy Statement (IPS), Strategic Asset Allocation (SAA) and Investment Guidelines (IG). The Risk Management Department (RMD) acts as the Second Line of Defense and responsible for providing the policy framework for the investment governance processin through an independent process of assessing, monitoring and reporting risks associated with the fund management activities of the EPF. Accordingly, providing applicable policy directions and guidelines relating to investment activities are handled by RMD through revising and updating the IPS, SAA and IG in line with updated market requirements, to improve the existing work procedures and to provide greater independence over the investment decision making process while maintaining an adequate level of internal controls.As the Third Line of Defense, Internal Audit Department provides risk assurance with regard to the fund management function of EPF.
Further, a distinct mechanism is in place for escalation and addressing of non-financial risks related to the overall EPF Department’s activities through a separate committee, the Non-financial Risk Management Committee (NFRMC). Accordingly, periodic reviews are conducted for identification and review of non-financial risks and to decide and monitor the risk mitigation actions thereon through RMD of CBSL.