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, EPF funds are invested with the view of providing maximum retirement benefits to members through prudent and innovative management of the fund.
Table 1: Investment Portfolio
| Type of Investment | End 2022 | End 2021 | ||
|---|---|---|---|---|
| Amount(Rs.bn.) | Share (%) | Amount (Rs.bn.) | Share (%) | |
| Treasury Bonds & Bills | 3,358.6 | 96.9 | 2,958.8 | 93.2 |
| Equities | 80.9 | 2.3 | 121.1 | 3.8 |
| Corporate Debt Instruments | 23.6 | 0.7 | 23.9 | 0.8 |
| Fixed Deposits | – | – | 57.2 | 1.8 |
| Reverse Repos | 3.4 | 0.1 | 12.3 | 0.4 |
| Total | 3,466.5 | 100.0 | 3,173.3 | 100.0 |
During 2022, the total investment income of the Fund amounted to Rs. 315.9 billion (Table 2). Interest income was the major source of income of the Fund and it grew by 18.9 per cent to Rs. 349.3 billion in 2022 from Rs. 293.7 billion in 2021. The dividend income realised from the equity portfolio increased by 12.6 per cent to Rs. 7,527.8 million in 2022, compared to Rs. 6.658.5 million earned in 2021.
Table 2: Income on Investments
| Source of Income | 2022 | 2021 | ||
|---|---|---|---|---|
| Amount(Rs.mn) | Share (%) | Amount (Rs.mn) | Share (%) | |
| Interest Income | 349,269.2 | 110.6 | 293,678.3 | 85.8 |
| Marked to market gain/loss from Equity | (40,878.1) | (12.9) | 41,840.1 | 12.2 |
| Dividend Income |
7,527.8 | 2.4 | 6,685.5 | 2.0 |
| Impairment of Financial Assets | (3.9) | – | (1.0) | – |
| Total | 315,915.0 | 100.0 | 342,202.9 | 100.0 |
The maturity profile of the government securities portfolio together with yield rates as at end 2021 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 | 144,212.7 | 5.0 | 7.73 |
| 1-2 years | 357,622.3 | 12.3 | 8.82 |
| 3-4 years | 592,422.7 | 20.4 | 10.32 |
| More than 5 years | 1,809,671.8 | 62.3 | 11.49 |
| Total | 2,903,929.5 | 100.0 | 10.73 |
Overall Return of the Fund
The Fund earned a total gross income of Rs. 316.2 billion in 2022 (Table 4). After adjusting for operating expenditure and tax expenditure, the net profit for the year 2022 was Rs. 264.1 billion which is a decrease of 11.7 per cent compared to that of 2021. The EPF was able to earn a 9.51 per cent Return on Average Investment in 2022 while maintaining operating expenses to a gross income ratio of 0.67 per cent in 2022.
With the introduction of the Inland Revenue Act, No.24 of 2017, which was effective from 01st April 2018, the income tax rate applicable for the fund increased from 10 per cent to 14 per cent. The applicable Income Tax rate for dividends received or derived by residents during the period from October 1,2022 to December 31,2022 is 15%. The tax expense increased to Rs.49,982 million in 2022 with 20.0 per cent increase compared to Rs. 41,657 million in 2021.
Accordingly, the EPF has declared an interest rate of 9.00 per cent on member balances in 2022.
Table 4 below indicates the summary of performance indicators of the Fund for the last five years.
Table 4: Five Year Summary of Key Performance of EPF
| Item | Rs. million | ||||
|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Interest Income | 229,446.0 | 254,681.0 | 277,409.0 | 293,678.3 | 349,269.2 |
| Dividend Income | 3,887.6 | 6,247.5 | 2,985.0 | 6685.5 | 7,527.8 |
| Realized Capital Gains / (Loss) | 7.2 | 0.1 | – | – | – |
| Net gain / (loss) from FS at FVTPL | (10,901.3) | (1890.0) | 5023.1 | 41,840.1 | (40,878.1) |
| Impairment of Financial Assets | (0.6) | 0.3 | 1.6 | (1.0) | (3.9) |
| Investment Income | 222,440.1 | 259,038.9 | 285,418.8 | 342,202.9 | 315,915.0 |
| Other Income | 402.9 | 283.8 | 212.1 | 171.7 | 270.4 |
| Total Gross Income | 222,843.1 | 259,322.7 | 285,630.9 | 342,374.5 | 316,185.4 |
| Operating Expenditure | (1,505.3) | (1,581.8) | (1,645.1) | (1,646.1) | (2,133.8) |
| Income Tax | (30,720.4) | (34,964.6) | (39,062.6) | (41,656.9) | (49,981.6) |
| Profit for the Year | 190,617.4 | 222,776.4 | 244,923.2 | 299,071.4 | 264,070.0 |
| Retained Profit b/f | 2470.9 | 159.5 | 129.1 | 429.9 | 61.3 |
| Capital Gain on Disposal of Equity | – | 90.0 | – | – | – |
| Unrealized Gain/Loss on Listed Equity | – | – | – | (40,503.8) | 40,887.7 |
| Profit available for distribution | 193,088.4 | 223,025.8 | 245,052.3 | 258,997.5 | 305,018.9 |
| Return on Investment(%) | 10.4 | 10.7 | 10.6 | 11.4 | 9.51 |
| Interest Rate (%) | 9.50 | 9.25 | 9.00 | 9.00 | 9.00 |
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.
