WASHINGTON - The Sri Lanka Employees' Provident Fund might move into domestic equities if the Central Bank of Sri Lanka adopts a consultant's recommendations.
Independent Fiduciary Services Inc., Washington, has recommended the $2.5 billion pension fund, which covers all private employees in the South Asian nation, increase its allocation to Sri Lankan stocks to 3%, up from 0.25% of its total assets, put 95% of its assets in fixed income and the remainder in cash.
The Sri Lankan central bank, custodian for the pension fund currently holds 86% of the fund's total assets in Sri Lankan rupee loans to the government, used to finance the government's budget deficit.
The loans, like special government bonds, are illiquid securities that earn fixed interest rates of between 11% and 14%, said S.S. Ranasinghe, head of accounts and fund management at the Sri Lankan central bank, Colombo.
Another 10% of the pension fund's assets are held in the nation's equivalent of Treasury bonds and 3.75% in cash.
IFS recommended the system move gradually into equities - over several years - in part because the pension fund dwarfs the nation's stock market, which has a capitalization of about $2 billion, and also because of concerns that investors anticipating movements by the pension fund would make front-running attempts. The pension fund holds both private employer and employee contributions - employers contribute 12% of pay, employees 8%.
"We urged great patience and gradualism in getting into the equity markets, and as the markets grow more sophisticated and the (fund's) internal structure is enhanced, gradually seek to increase that exposure," said Samuel W. "Skip" Halpern, IFS executive vice president and general counsel.
The Sri Lankan government is expected to decide by mid-2000 on the consultant's recommendations, submitted at the end of June.
The asset allocation suggestions made by IFS are part of a larger set of recommendations the company has made for modeling the Sri Lankan private pension system on the U.S. pension system. The proposals are intended to ensure the assets of the pension fund are held solely for the benefit of private sector employees it covers.
The recommendations, under the aegis of a World Bank program, are also intended to wean Sri Lanka away from using the pension fund to finance its budget deficit. The recommendations
come at a time when the nation expects to cut the deficit - currently about 10% of the nation's economy - in half over the next five or six years.
"We proposed that they distinguish between rupee loans and market-based instruments, and that they have as a primary mission for the fund to provide optimum benefits to participants," Mr. Halpern said.
But before the Sri Lankan pension fund can think about rejiggering its asset allocation, it needs to work on fundamentals such as calculating its liabilities. The pension fund has no idea of its liabilities largely because the island country lacks a procedure for keeping track of plan participants and their movements from job to job. The nation hopes to have a national identity code system similar to Social Security set up in the next year or two, and then conduct an actuarial study calculating its approximate liabilities. The system had an estimated 7.2 million accounts at the end of 1997, the most recent available data.
Moreover, the nation also needs to address concerns about a large government-controlled entity investing in the private capital markets. To address those apprehensions - similar to the worries some have voiced in the United States over proposals to invest Social Security assets in the stock market - IFS recommended the fund be set up as a separate trust, akin to U.S. private pension funds, and that it be administered by an independent board of trustees that would have the authority to hire and fire outside investment managers.
IFS also recommended the pension fund adopt investment standards similar to those followed by large U.S. pension funds and develop fiduciary standards similar to those included in U.S. federal pension law.
