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Mandatory Savings and Mandatory Savings and Retirement Adequacy: A Retirement Adequacy: A Portfolio Simulation of Portfolio Simulation of
EPF in Sri LankaEPF in Sri Lanka
Wasana Wasana KarunarathneKarunarathneThe University of MelbourneThe University of Melbourne
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AgendaAgenda
The Employees Provident Fund (EPF) The Employees Provident Fund (EPF)
EPF’s Investment PerformancesEPF’s Investment Performances
Empirical FindingsEmpirical Findings Does EPF Provide Sufficient Member Balances?Does EPF Provide Sufficient Member Balances?
Member Balances under Different Portfolio Member Balances under Different Portfolio InvestmentsInvestments
Parametric Reform OptionsParametric Reform Options
Policy RecomendationsPolicy Recomendations
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The EPF SchemeThe EPF Scheme
EPF is implemented in 1958
Major vehicle for private sector employees
Covers around 30% of the labour force (80% of the private sector employees)
Fully funded, defined contributory (DC) type
Centrally managed by the Central Bank of Sri Lanka on behalf of the government
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Contribution Rate: 20% of gross salaryContribution Rate: 20% of gross salaryMandatory for both employers (12%) Mandatory for both employers (12%) and employees (8%)and employees (8%)
Benefits: lump sum PaymentBenefits: lump sum Payment
Retirement age: 55 years Retirement age: 55 years
Pre-retirement withdrawals: allowed Pre-retirement withdrawals: allowed for housing purposesfor housing purposes
EPF Scheme cont.
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EPF Scheme cont.
4
6
8
10
12
14
16
18
20
1995 1996 1997 1998 1999 2000 2001 2002
cont / GDS (%)
EPF Sav / GDS (%)
Figure 1: EPF Contributions and Savings, 1995-2002
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Investment PerformanceInvestment Performance
EPF investments are highly regulated EPF investments are highly regulated and restricted to invest in and restricted to invest in government securitiesgovernment securities
in briefin brief
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35.50%
61.03%
0.50%
Rupee Loans
T. Bonds
Equity Shares
Inv. Performance cont.
Figure 2: EPF, Investment Allocation, 2002
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2.0000
4.0000
6.0000
8.0000
10.0000
12.0000
14.0000
16.0000
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
-20
-15
-10
-5
0
5
10
15
Nominal
Real
Figure 2: EPF, Real and Nominal rates Return, 1960-2002
Inv. Performance cont.
10
12
14
16
18
20
22
1988 1990 1992 1994 1996 1998 2000 2002
EPF
FixedDeposits
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Empirical Findings:Empirical Findings:
Does EPF provide adequate balances? Does EPF provide adequate balances?
The paper calculates The paper calculates
The Capital Accumulation Ratio The Capital Accumulation Ratio (CAR)(CAR)
Replacement Rate (RR)Replacement Rate (RR)
Next slide provides the results under Next slide provides the results under the baseline scenariothe baseline scenario
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Pre-retirement Withdrawals Pre-retirement WithdrawalsCAR RR CAR RR
Cohort 5 5.48 53.31 4.07 39.60Cohort 6 5.42 52.96 4.01 39.18Cohort 7 5.88 57.73 4.33 42.49Cohort 8 6.33 62.26 4.62 45.46Cohort 9 6.56 64.89 4.75 46.99Cohort 10 6.82 67.85 4.90 48.80Average 6.20 61.14 4.52 44.58Standard Deviation 0.55 5.89 0.35 3.81Coefficient of Variation 8.93 9.64 7.84 8.54
Without With
Note:
Replacement rates have been calculated using nominal discount rates
Coefficient of variation is SD/ Mean and generally expressed as a percentage
Table1: Base Line Case: Capital Accumulation Ratio and Replacement Rate
Average RR in real term: 30%
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Could the situation be changed, if Could the situation be changed, if EPF used diversified portfolios? EPF used diversified portfolios?
Empirical Findings cont.
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R Loans T- Bills Stocks Balance 1 Balance 2 Balance 3
100-0-0 0-100-0 0-0-100 60-30-10 20-40-40 10-30-60
Cohort 1 5.58 6.15 19.38 6.87 10.63 13.37 4.50Cohort 2 5.98 6.87 18.06 7.32 10.91 13.30 4.84Cohort 3 6.14 6.87 10.18 6.81 8.84 9.68 4.69Cohort 4 6.14 7.56 8.69 7.16 8.74 9.14 5.06Cohort 5 6.49 7.91 9.42 7.54 9.24 9.73 5.48Cohort 6 6.30 7.74 6.99 7.14 8.10 8.08 5.42Cohort 7 6.79 8.37 6.49 7.57 8.20 7.95 5.88Cohort 8 7.20 9.36 4.92 7.90 7.84 7.08 6.33Cohort 9 7.48 9.74 6.17 8.36 8.77 8.21 6.56Cohort 10 7.76 9.83 7.30 8.69 9.45 9.12 6.82Average 6.58 8.04 9.76 7.54 9.07 9.56 5.56Range 2.18 3.68 14.46 1.88 2.79 6.29 2.32Standard Deviation 0.70 1.27 4.98 0.62 1.02 2.15 0.81Coefficient of Variation 10.69 15.86 51.07 8.22 11.28 22.49 14.63
Base lineCase
Table2: CAR under Diversified portfolio Investments
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Empirical Findings cont.
Parametric Reform OptionsParametric Reform Options
Available OptionsAvailable Options Reform the investment functionReform the investment function
Increase retirement ageIncrease retirement age
Increase contribution rateIncrease contribution rate
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Table2: CAR under Diversified portfolio Investments
A. B. C.
Increase Increase Investment
Retirement Contribution Function
Age to 60 Rate Reforms
Balance 2
Cohort 1 4.50 5.84 4.95 10.63 9.17 11.69 6.43 10.09Cohort 2 4.84 6.33 5.33 10.91 9.28 12.00 6.96 10.21Cohort 3 4.69 6.80 5.16 8.84 8.86 9.73 7.47 9.75Cohort 4 5.06 7.03 5.56 8.74 9.89 9.61 7.73 10.88Cohort 5 5.48 7.30 6.03 9.24 10.65 10.17 8.03 11.72Average 4.91 6.66 5.40 9.67 9.57 10.64 7.33 10.53Standard Deviation 0.38 0.58 0.41 1.02 0.71 1.13 0.64 0.78Coefficient of Variation 7.67 8.70 7.67 10.57 7.41 10.57 8.70 7.41
A, B andC together
A and ctogether
B and Ctogether
A and Btogether
Base LineCase (No Pre-retirement Withdrawals)
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RecommendationsRecommendations Pension reforms should not be carried out in
isolation. it should be an integrated part of overall economic reforms.
Issues relative to accumulation phase as Issues relative to accumulation phase as well as decumulation phase should be well as decumulation phase should be addressed.addressed.
Political commitment and greater literacy Political commitment and greater literacy required. Unnecessary government required. Unnecessary government intervention on EPF activities should be intervention on EPF activities should be minimized. minimized.
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RecommendationsRecommendations
Enhance the professionalism of the Enhance the professionalism of the management. management.
Improve the investment function. Improve the investment function. Diversify portfolios. Gradually de-link Diversify portfolios. Gradually de-link provident funds from budgetary provident funds from budgetary financing financing
Limit pre-retirement withdrawalsLimit pre-retirement withdrawals
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Thank Thank you!you!Contacts:Contacts:
Wasana KarunarathneWasana KarunarathneDepartment of EconomicsDepartment of EconomicsUniversity of Melbourne,University of Melbourne,
Economics and Commerce BuildingEconomics and Commerce BuildingVictoria, 3010, AustraliaVictoria, 3010, Australia
Phone: 61 3 8344 5397Phone: 61 3 8344 5397Email: Email: lakminik@unimelb.edu.aulakminik@unimelb.edu.au
I would like thank National University of Singapore for financial support provided for my PhD research.