EPF should halt SMB transactions, share market purchases
By Rajiesh Seetharam
As per the forensic audit report, the Employees Provident Fund (EPF) has made a net loss of LKR 2,556 million, during period of January 2002 to February 2015, through Primary Bond market transactions. EPF has made a loss LKR 9,470 million by investing in listed companies in share market and LKR 389 million by investing in unlisted companies during the period 1998 to 2017. These are impaired or realised losses. Marked to market losses till 2019, amount to LKR 24,144 million.
For better management of EPF, Colombo based Think Tank Verite Research recommends halting EPF investments in secondary market bond transactions and share market purchases. The Verite Research report on EPF transactions notes that secondary market bond (SMB) purchases of EPF results in large scale movement of public money into private hands. “Sufficient bonds are available for purchase in weekly bond auctions in the primary market, and also there is no requirement to sell bonds (or perform active market trading) as the time horizon is long.”
Presenting the report at an online forum, Verite Research Executive Director Nishan de Mel recommended a system in which the Central Bank can come up with a facility where excess funds not sold in the primary auction, could be offered to EPF at the weighted average auction price and given right of first refusal. ‘In that case EPF need not worry about its bid prices.’ He further added ”When one supplier has large market power like EPF, and if there is a price discovery by another party, then that party can bid at EPF bid price and get higher quantity at EPF bid price.
The way to prevent such scams is to halt EPF transactions in the secondary market. Though the February 2015 bond scandal was mainly referring to primary market transactions, 2016 reports gave an indication that there is an unseen scandal in the secondary market. EPF hasn’t released the details of secondary market bond transactions yet.” Verite Research filed an RTI in May 2017 asking for details of secondary market bond transactions; however, the EPF has rejected the request. Despite going to the RTI commission and later to the Court of Appeal, Verite Research hasn’t yet been able get the data for almost four years now. The hearing at Court of Appeal is constantly postponed due to various delays in the legal system, notes the Verite Research report.
The other recommendation made by Verite Research is to halt share market purchases by EPF. “One argument made by Central Bank, in favour of share market transaction, based on the October 2018 Monetary Policy, is that primary bond market does not cater to the demand of EPF. This claim is analytically flawed, as the October 2018 monetary policy fails to recognise the requirements that arise from future budget deficits.” Forecast of Verite Research for period 2018-2025 indicates Government’s borrowing requirement exceeds EPF. “The other argument is that share market offers a better return on investment for EPF. An average effective annual return for on one-year treasury bills for a 25-year period was 11.1 per cent. Average effective annual return on the stock market for a 25-year period was 7.5 per cent.
EPF is not there as trader, but rather as a long-term investment portfolio. Even considering a short 5-year period, investments in bonds outstrip the return on investments in stock market except for one or two years, however if you risk adjust it, then the share market still offers a lower return.” The Verite Research report further recommends higher standards for Information Disclosure of EPF at least as much as banks and publicly quoted companies, the Bank Supervision Department of CBSL to supervise the EPF, Perform Independent Forensic Audits every three years, hold public meetings to discuss findings and recommendations, and constant disclosure on corrective actions.
De Mel added “EPF is the largest fund with around two trillion of private sector savings. EPF report should be published annually. There is no annual report for the past four years now. It is not only the responsibility of Labour Ministry, but also of EPF. Repeating Forensic audits every three years may bring protection, better governance of EPF, discipline among EPF and also among traders because they realise that forensic audits could be done again. But if they are forgotten, traders or EPF fund managers may repeat the past.”