By Chandra Jayaratne –

Chandra Jayaratne

Three Cheers – Highest commendation and due recognition of the Governance Team’s leadership actions managing the Covid Crisis. These followed best professional advice, with effective management and implementation. However, some associated economic decisions are questionable and appear warped!

The decision to request bakers to undertake home deliveries of normal bread, incurring added costs and extra resource mobilization, within the previously set controlled price was bound to fail ab initio. A government minister committed to buy all vegetables received at economic centers, disregarding established wholesalers/transporters and then set maximum selling prices for sale by producers and retailers, leading to disastrous consequences of waste and service disruptions. The imposition of below land cost controlled retail prices for Dhall and Tinned Fish caused severe shortages and the position worsened by the thoughtless actions of the Consumer Affairs Authority. The State Team attempting to distribute essential food, vegetables and medicines via state institutions, without leveraging the smallest retail stores closest to the households, (effectively reached normally by distribution and supply chains of leading manufacturers like Unilever/Ceylon Tobacco/ Capital Maharajah/Reckit & Colman etc,) was bound to be a failure. 

If our economic decisions in the aforesaid distribution initiatives had followed the successful social infrastructure maintenance strategy adopted in Whuhan, where full cost recovery and attractive returns were granted to private retailers/distributors: small mom & pop stores were leveraged as the back bone of food distribution; and they were allowed to make home deliveries supported by ICT applications developed by volunteers and sell at an average over normal costs profit margin of 30%; with the state buying all perishable vegetables and meat and using privates sector reefer truck and logistical providers for free nutrition support to the poor and retail chain supplies; and all  producers of essentials were encouraged to seek self-sufficiency in agricultural and industrial output enhancements, with incentives/facilitation support and best technology  and advice; the citizens of Sri Lanka would have benefited and the future growth contributions enhanced.

The most recent thought leadership pronouncement of the senior economic advisor of the Prime Minister, to return about 20 percent of Employees Provident Fund balance to holders (estimated release of Rs. 500 billion), after the Coronavirus pandemic ends, on the rationale that the island no longer had fiscal space to boost the economy after recent tax cuts, appears to be highly questionable and even fully warped! 

He is quoted as “This simple and uncomplicated return of capital could be a useful and viable alternative that could achieve the same outcome of serving as an economic stimulus, without any fiscal burden being placed on the Government,”; “In addition, this newly created “equity” in the hands of around 2,500,000 individuals would expand further and perhaps even double, as many recipients are likely to leverage such funds with borrowings from lending institutions, which would provide a further boost to the economy.”: “By “unlocking” this vast pool of funds at the present time, and through the release of such finances which would be circulating amongst millions of people, many other “knock-on” benefits would also accrue to the people and the economy.” He describes the expected benefits as: benefits would be: 1) enhanced economic growth being recorded in the economy due to the higher investment and consumption as a result of the funds infusion.(2) many persons being able to settle their high interest debt which is presently crippling them.(3) new business ventures being created as a result of persons with entrepreneurial ideas and abilities being able to embark on new business ventures.(4) more opportunities opening out for the financial sector to lend, since persons who are embarking on new economic activity are likely to leverage their new equity with debt.(5) business confidence being enhanced and optimism rekindled due to the higher level of economic activity as a result of investment of the newly released “locked” savings, in the wider economy.(6) an upturn being recorded in the small-scale construction activity in all parts of the country, which is now at a standstill.(7) enhanced employment opportunities arising in the Small and Medium Enterprises sector of the country, leading to lower social tensions.(8) Government tax revenues improving due to the rise of the level of economic activity throughout the economy.

This suggestion, with the exception of a partial benefit from (2) above, prima facie appears selfishly developed, almost totally to benefit the economy in general and meet socio-political and economic objectives of the State in the future and appears totally long term negative from the perspective of the accountholder/stakeholder. It is of utmost importance to realize that the action suggested is attempting an enforced state sponsored release of an earned superannuation benefits entitlement of stakeholder, without their express desire. The Government targeting political advantage before parliamentary elections having released an  a fiscal stimulus which was unwarranted and unaffordable from the fiscal and debt management standpoints appears now to “pick the pockets” of workers and deprive them partially of their only retirement safety net. This could be a high way robbery on one hand and will create a society without sufficient social security in retirement.

Superannuation Funds are meant to meet the needs of the workers and their family needs in retirement and is available early mainly for purchase of land and construction of housing. With an aging population and low interest earnings expected on savings, these early distributions will leave the retiree elders in a hopeless state of poverty in the future. Sri Lanka has enough and more case studies to demonstrate that consumption spends, gifts and unwarranted spends of lump sum receipts are the norm by the recipients, and a majority of recipients will be in misery in the latter years of life, especially unlike in USA, Europe and Australia, aged, retirees  and unemployed  persons are not protected by social security payments, a safety net not available to Sri Lankans.

Did it not occur to the Advisor that the State EPF covers only superannuation retirement savings of formal work force and does not include the employees covered by the Private Provident Funds? If it was the intent to engage all productive persons with savings, within this scheme there is a need to expand the savings of self-employed persons, expatriate workers, insurance funds, bank deposits and other investments of all in society below retiring age: and absurdly even extend to cover Businesses by being to declare as dividends and capital distributions all retained profits?

With over 90% of EPF Funds being invested in State issued Securities (Bonds and Bills and other State sponsored Investments in businesses), will 20% of these be sold in the secondary market to realize the Rs. 500 billion to be returned to account holders? if so who will buy them? at what rate of discount? who will bear any realization losses in comparison to existing market value in books? Will in the alternative the Central Bank buy them and create an additional helicopter drop?What will the impact of such a move on the exchange rate and inflation?

The Australian Federal Government announced stimulus package includes provisions allowing for a limited early release of superannuation benefits for financial stress; and a temporary reduction in pension minimum drawdown rates enabling early release of superannuation.  The definition of compassionate grounds for the release of part of a super benefit to include assistance to deal with the adverse economic effects of COVID-19 if the person are unemployed; eligible to receive certain social security payments, such as the jobseeker payment, certain youth allowance payments, the special benefit or farm household allowance; or on or after 1 January 2020: the person was made redundant; or their working hours were reduced by 20 per cent or more; or if they are a sole trader, the business was suspended or there was a reduction in the business’ turnover of 20 per cent or more. Two applications for the release of a lump sum, each of which is up to $10,000, can be made in 2020 and in 2021.[2] 

The suggestions in response to the coronavirus pandemic that pausing superannuation contributions would stimulate the economy led to Association of Superannuation Funds of Australia chief executive Martin Fahy being blunt in his assessment of the situation. “These are anxious times and a strong fiscal response is warranted, but raiding Australia’s superannuation system is not the solution to the economic challenge we face,” “Given where interest rates are, and taking into account the government’s borrowing capacity, it doesn’t make sense to raid retirement savings and compromise our long-term security in retirement.”[3] 

Rainmaker Group head of research Alex Dunnin said the idea of pausing super contributions in economically tough times has some merit – and some precedence. In 1998 in response to the Asian Financial Crisis the Singapore government did just that. “In Singapore, compulsory contributions into their Central Provident Fund (CPF) are 37%. Employees pay 20% and employers 17%,” “Singapore’s CPF plays a central role in their economy, much more so than Australia’s superannuation system does in ours. This is because CPF has three elements: it’s a retirement account, it’s a home saving fund and it’s a health insurance fund. “while stimulating the economy with super could work, there’s no way the current government would do it. “Stimulating the economy is a good idea. Using super to do to it is a nuclear option. It depends on the extent of the emergency,” “It is a lever that could be pulled though, but it’s drastic. “. “Super exists by the stroke of a pen,” Dunnin said.” The government can change it at their whim. It’s why social license matters.” By pausing SG, Australians may actually lose out on investment gains that could be made as the economy bounces back.” As the Prime Minister said today, the global economy will bounce back on the other side of this health shock,” Fahy said. “Pausing SG contributions would rob Australians of the opportunity to capitalise on that recovery and to maximise their retirement savings.[4]

In Malaysia the Employees Provident Fund (EPF) should specifically ask members to apply for lower deductions under the Covid-19 Stimulus Package instead of automatically reducing the contribution rate from 11 per cent to 7% (ie. only 4%reduction)[5].

 In the backdrop of outbreak of COVID-19 , numerous measures are being taken by the Government India to give relief to workers  under the Building  and Other Construction Workers Act, 1996 all State Governments/UTs have been advised  to transfer funds in the account of construction workers through DBT mode from the Cess fund collected by the Labour Welfare Boards.  About Rs 52000 crore is available as cess fund and about 3.5 crore construction workers are registered with these Construction welfare Boards[6]. 

Consideration is being given in some countries to halt superannuation deductions for two months commencing April. The US Covid Stimulus Bill permits the use of retirement funds and waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1.[7]

The publication “Pensions at a Glance 2013 – OECD and G20 Indicators”- Chapter 1 titled “Recent pension reforms and their distributional impact”[8] sets the key goals of pension reform as 1.Pension system coverage in both mandatory and voluntary schemes   2. Adequacy of retirement benefits 3.The financial sustainability and affordability of pension promises to taxpayers and contributors 4.Incentives that encourage people to work for longer parts of their lifetimes and to save more while in employment.5.Administrative efficiency to minimise pension system running costs.6. The diversification of retirement income sources across providers (public and private), the three pillars (public, industry-wide and personal), and financing forms (pay-as-you-go and funded). The last goal being the seventh, residual, category covers other types of change, such as temporary measures and those designed to stimulate economic recovery with the “other reforms” category covering a mixed bag of policy measures. Although their objectives differ from those typical of pension systems, they nonetheless affect pension parameters. Helping people to ride the financial crisis has been a priority in many OECD countries and policy packages implemented to that effect have often involved pension systems. For example, Iceland has allowed early access to pension savings so that people hit hard by the economic downturn have some financial support. The Australian government issued new benefit packages designed to assist people in meeting such needs as home care and the payment of utility bills. Public contribution to the New Zealand Superannuation Fund was discontinued in 2009. The measure has accelerated the gradual run down of this fund which was originally scheduled from 2021 onward. The purpose of all these measures has been to induce people to spend money to support domestic demand and thus speed up economic recovery. In many cases, they have also been part of action plans to prevent low earners and pensioners slipping below the poverty line. Some countries have also retreated from earlier commitments to pre-finance future pension liabilities through reserve funds. Ireland, for example, has used part of its public pension reserves to recapitalize the country’s banking sector teetering on the brink of financial default. The country has suspended any further contributions to the National Pension Reserve Fund in response to its large budget deficit. Similarly, the French government began to draw on its national pension reserve (Fonds de réserve pour les retraites) much earlier than originally envisaged – in 2011 rather than in 2020. Other countries, like Australia and Chile, however, have maintained their commitment to pre-funding, although it should be said that they have not been as badly affected by the economic crisis as Europe.

The stakeholders of EPF, Trade Unions, Intellectuals and Activists must strongly voice their views, debate and advocate against this warped unjustified and unwarranted action suggestion of an Advisor, whose motives appear driven with an eye on managing future governance challenges and not based on the Principle of “Placing the Interests of the People First”.