• Report says fund’s design prevents it from developing capital markets
• SL to reach ‘aged’ status by 2030

The Employees’ Provident Fund (EPF) has 96% of its portfolio invested in government securities, and its structural design prevents it from helping develop Sri Lanka’s private capital market, a World Bank report has said. The report also projects that Sri Lanka will become an “aged” society in 2030.

The report, ‘Demographic Change in South Asia: From Tailwinds to Headwinds for Development’, prepared by World Bank staff, puts the EPF’s assets at roughly 15% of GDP. That compares with under 10% for India’s provident fund and over 60% for Malaysia’s. The report said these relatively large assets, by regional standards, are an opportunity for private capital market development. However, the fund’s structural design, including its liquidity obligations, prevents it from seizing that opportunity.

According to the report, the concentration in public debt in both Sri Lanka’s and India’s provident funds reflects statutory mandates that prescribe minimum allocations to government instruments. Governments’ historical use of these funds as a captive source of financing for public spending compounds it. It said shallow private capital markets, bans on foreign investment and weak governance leave government bonds as the default option for fund managers.

EPF members can make sizeable withdrawals for housing, education, marriage and medical needs from a single pooled account, which serves as both a retirement fund and an all-purpose savings vehicle. Such withdrawals, the report said, require fund managers to hold enough liquidity to honour them, at the expense of longer-term investments with stronger returns.

Across the region, it said, these features leave workers who contributed for years with balances too small to provide meaningful retirement income. Sri Lanka sets the retirement threshold for women at 50, while retirement ages in the region generally range from 55 to 60.

The findings follow a book by International Monetary Fund (IMF) staff, launched in Bangkok last month, which placed Sri Lanka among four Asian economies at greater risk of growing old before growing rich. That book put Sri Lanka’s pension replacement rate at about 40% or less.

The World Bank report cites 40% of pre-retirement wages as the minimum needed for basic financial security in old age.

According to the report, Sri Lanka’s working-age share of the population peaked in 2005. The country is projected to reach aged status in 2030, when people aged 65 and above will make up 14% of the population. Other South Asian countries are projected to reach this point between 2044 and 2059. The report said Sri Lanka currently stands alone in South Asia, alongside select Indian states such as Kerala, in having to run ageing-related systems at scale.

It also points to gaps in protection for those outside formal employment. Although informality among prime-age workers is relatively low in Sri Lanka, it rises sharply among those aged 55-64 and reaches almost 100% among workers aged 65 and above. Social pensions begin at age 70 and provide benefits amounting to a fraction of the national poverty line.