The Employees’ Provident Fund (EPF) is the largest superannuation fund in the country, with a value of about Rs. 3.8 trillion and about 95% of it invested in Government securities by the end of 2023.
Due to this heavy involvement in Government securities, it has been at the centre of major scandals.
Verité Research has said that the systematic methods of extracting EPF funds for the profit of private parties and Government interests are a money heist of a colossal scale, noting that the data that can expose this fully remains concealed. However, some limited data is available from the Central Bank of Sri Lanka (CBSL) forensic audit of 2019.
The forensic audit revealed that the EPF had lost nearly Rs. 10 billion from just the irregular bond transactions prior to February 2015.
Nevertheless, this could be just the tip of the iceberg, given that the forensic audits did not cover the period of the ‘bond scam,’ with the ‘heist’ occurring in various other ways as well.
In Sri Lanka, 20% of the gross income of formal sector workers is contributed to the EPF as savings for retirement. This means that the continuous ‘heist’ involving the EPF is hurting the future social security of today’s formal sector workers.
The net worth of the EPF significantly increased by 11.5%, year-on-year, by end-2023 compared to end-2022, which was mainly attributed to the income generated through the prudent investments of the fund.
The total liability to the members also increased by 12.9% during this period. Meanwhile, total contributions received for 2023 increased by 8.2%, while the total amount of refunds disbursed to the members and their legal heirs significantly increased by 32.4%.
Consequently, the net contribution of the fund was reported at a negative Rs. 5.3 billion in 2023, compared to a positive contribution of Rs. 31.6 billion recorded in 2022.
The CBSL in its Annual Policy Statement of 2024 said that the EPF was to seek avenues to diversify its investment portfolio to generate a higher risk-adjusted rate of return while ensuring the safety of the overall fund.
2019 forensic audit did not cover bond scam losses
Speaking to The Sunday Morning, Verité Research Lead Economist Anushan Kapilan said that the CBSL bond scam had taken place when certain entities such as Perpetual Treasuries had received Treasury bond bids at a higher rate and sold them to the EPF in the secondary market at an even higher rate, causing the EPF to incur huge losses.
He said this was one of the reasons for conducting a forensic audit in 2019 in order to assess the bond market losses and the share market losses of the EPF.
However, he added that the biggest shortcoming of the forensic audit was that it had only covered the period between 2002 and February 2015, while the bond scam transactions had taken place after that period.
Kapilan further pointed out that the bond scam transaction had continued until 2016, which was also highlighted in the Presidential Commission of Inquiry (PCoI) report submitted in 2018.
“Although they didn’t go to find out the losses incurred by the EPF, they said that Perpetual Treasuries had gained around Rs. 6-8 billion by selling those bonds to the EPF,” he added.
The report by the PCoI said that at the auction held on 27 February 2015 alone, Perpetual Treasuries Ltd. had made a minimum benefit of over Rs. 688 million, noting that further investigations could reveal this amount to be even greater.
As revealed during the investigations, Perpetual Treasuries Ltd. had made an undue profit of Rs. 11,145 million in the secondary market. As a result, the EPF and other Government institutions had lost more than Rs. 8.5 billion.
However, Kapilan said that since there had been no proper study on the loss incurred by the EPF, the public remained unaware of the exact loss incurred by the fund.
He also said that prior to the bond scam, the forensic audit had revealed that the EPF had incurred bond market losses of nearly Rs. 10 billion during 2002-’15 and that Rs. 9 billion of those losses had come from the primary market, where the Government had sold to the EPF at a price lower than the market price, whereas in the secondary market, the fund had lost around Rs. 700 million.
Kapilan added that the reasons for such losses were governance failures, where investment decisions had been subjected to external parties, and as revealed by the forensic audit, the heavy intervention of then CBSL Governor Ajith Nivard Cabraal in investments decisions.
He further noted that no proper approval processes had been followed in taking these investment decisions.
Forensic audit revelations
The forensic audit reported nearly Rs. 10 billion (Rs. 9,826 million) in losses to the EPF due to irregular bond market transactions from 2002 to 2015. It also reported irregular transactions in the share market resulting in losses to the EPF amounting to Rs. 9,470 million in listed equity and Rs. 389 million in unlisted equity from 1998 to 2017. These losses, stemming from irregular transactions in both the bond market and share market, amount to nearly Rs. 20 billion.
It revealed that the EPF had bought stocks without analysis and without approval of an investment committee.
It further noted that large volumes of stock had been bought from firms connected to the Perpetual Group and related firms linked to Arjun Aloysius.
In the forensic report conducted by KPMG, auditors said that some investments had been made without approval and analysis from an investment committee or the Monetary Board and that there had been irregularities in adding companies to the investment lists. In some cases, there had been deal tickets, without which settlement sheets had not been signed.
The audit further revealed that the EPF had bought Rs. 737 million of stock in Brown & Company PLC for which documentation had shown Investment Committee approval from S.H.M. Rishan, who had been involved in PC House, a listed company which had been removed from the stock exchange for non-compliance.
“The deal ticket for the transaction was unsigned, hence the dealer executing the trade could not be identified,” the report said. The EPF had incurred losses of Rs. 1.1 billion on a portfolio of 6.6 million shares of Browns.
The EPF had invested in banks against the investment and trading guideline, seemingly on the
instructions of then CBSL Governor Cabraal. These investments had later been ratified by the Investment Committee and the Monetary Board.
The report showed that no approvals were available for investments of Rs. 463 million in non-bank financial institutions.
Companies linked to the family of former Governor of the CBSL Arjuna Mahendran’s son-in-law had also sold stocks to the EPF at high prices, which had resulted in losses.
In 2015, the EPF had bought Rs. 965 million worth of stock in Ceylon Grain Elevators. The deals had not been in the Investment Committee’s weekly plans but had been ratified later. The EPF had bought a total of Rs. 1,051 million worth of stock in Grain Elevators.
The report showed that about 95% of the stock had been bought from Perpetual Capital Ltd. and that the EPF had lost Rs. 651 million by the review period. An EPF superintendent had said it had been a management decision and the Governor had explained that prospects were good for poultry.
The EPF had bought stock in Carson Cumberbatch for Rs. 2.5 billion – a major counterparty was an entity called Thurston Investments.
Media reports had said that Thurston Investments was linked to the grandfather of Aloysius. However, the forensic auditors said there were no Know Your Customer details of the counterparty to confirm whether it was the same company.
In the case of the Rs. 801 million spent on buying shares in Galadari Hotels (Lanka) PLC at the highest price in the market, deal tickets or settlement sheets were not available. No evidence was also found on financial investments.
In the case of Laugfs Gas, the middle office had calculated the value at Rs. 40 per share and purchases of up to Rs. 48 had been given for 33 million shares, breaching a shareholding limit set for the fund, although no approval had been given.
Employees had stated that having consulted with the Governor, it had been agreed that the price was fair. It was subsequently ratified by the Investment Committee. There was no impairment loss on the stock at the review date.
The EPF had also bought shares of SriLankan Airlines. There had been a letter from the Ministry of Finance addressed to the Bank of Ceylon but not the EPF. EPF employees had said that the investment could have been made in the ‘national interest’ with instructions from the top-most level.
The fund had also bought SriLankan Catering preference shares, where Governor Cabraal had been involved in decision-making. Employees said it may have been due to instructions from the Government. The EPF had also bought stock at Canwill Holdings Ltd.
Under the investment policy statement, the EPF Investment Committee and fund management staff were expected to give statements of economic interest of themselves and family members. The requirement was removed in 2011 and reinstated in 2018.
The statements however were in sealed envelopes and there was no review mechanism. They were to be opened only in the case of a court order.
The report said controls on conflicts of interest of EPF employees appeared to be ineffective and there was no monitoring mechanism to track employee trading despite them being potentially privy to EPF trades.
Former Prez directly responsible for bond scam
Speaking at the Cabinet media briefing on Tuesday (8), Cabinet Spokesman Minister Vijitha Herath claimed that the entire country knew that when the bond scam had taken place, Ranil Wickremesinghe had been “both Prime Minister and Finance Minister” while his ally Mahendran had been serving as the CBSL Governor, with these two being the prime suspects in this massive fraud.
He said that previous investigations into the bond scam were incomplete and compromised due to lack of action against the involvement of “big-wigs”.
Herath added that Wickremesinghe bore direct responsibility for the scam, which saw irregularities in bond issuance and alleged financial misconduct that caused losses to the State.
He also said that previous investigations under parliamentary committees, such as the Committee on Public Enterprises (COPE), had been derailed due to political interference and the dismissal of Parliament during the inquiry process.
What can be done to avoid another loss to EPF?
Kapilan noted that information pertaining to the bond scam was yet to be made public because the CBSL had not been very transparent about such matters. However, in order to avoid such issues from recurring, the CBSL has implemented a few measures such as having recordings and emails of investment decisions.
“The EPF has to be transparent, especially when other funds are far more transparent and they publish more details on a regular basis on each security investment,” Kapilan said.
He said that despite Verité Research requesting such transaction information through the Right to Information (RTI) process, it had been rejected by the CBSL, claiming it was market-sensitive information.
Kapilan added that the EPF had to be more transparent by at least reporting the yield rates of bond investments every month while a forensic audit that scrutinised every investment had to be conducted on the EPF at least once every three years.
Furthermore, he said that the accountability of the EPF should be improved as there was no accountability from the employees of the fund at present.
He noted that in private sector pension funds, individuals who managed the funds made proper investment decisions because they were likely to get a higher return as their money was also going into the fund. However, in the case of the EPF, people are mandated to contribute to the fund and those who are employees of the fund lack a motive to gain a higher return, unlike CBSL employees who have a separate fund for themselves.
Proposal to remove EPF from CBSL did not proceed
Speaking to The Sunday Morning, a top official from the EPF said that the proposal to amalgamate the EPF and the Employees’ Trust Fund (ETF) under a separate entity had not gone ahead after Budget 2024.
The official said that the previous Government had not initiated any legal amendments for such an amalgamation.
The proposal to have the EPF and ETF under a separate entity was introduced last year, especially during the Domestic Debt Optimisation process in order to relieve the CBSL of EPF duties.
The official added that the amendments proposed for the EPF Act had included changes such as integrating digitalisation rather than amalgamation processes.
Further, speaking on the investment decisions taken by the EPF, the official said that the Investment Committee of the EPF made most of the monthly and day-to-day investment decisions, while it required the approval of the Monetary Board for annual investment decisions.
