12th March 2011, www.lankabusinessonline.com
A pension fund of private Sri Lankan citizens managed by the state has made large capital gains by investing in stocks with the share of equity in the 900 billion rupees fund rising to 5.0 percent from 1.3 percent, its managers said.
Sri Lanka's Employees Provident Fund, which is made up forced savings of private citizens managed by the state, had invested 32 billion rupees in stocks, its managers, the Central Bank said.
The fund had made 1.5 billion rupees in realized gains and is sitting on a further 16.2 billion rupees in unrealized gains, the Central Bank which manages the fund said.
EPF had invested in banking, finance, insurance, hotel and travel and diversified sectors, a Central Bank said.
"Since a major portion of the EPF’s equity investments are held in the long term portfolio, further substantial gains are also expected to be realized in the future," the Central Bank said.
Unlike in countries like Singapore where the central provident fund covers state and non state workers, in Sri Lanka the EPF is made up deductions from the salaries of private citizens only.
State workers get lifetime pensions from taxes paid by all citizens with no contributions. The government is shortly to pass laws to deduct more money from the salaries of private citizens.
The bulk of the pension money belonging to private citizens is used for state deficit finance. About 94 percent of the fund was still invested in government securities.
Sri Lanka's capital market professionals have long called for a higher level of the fund to be invested in stocks giving an opportunity for workers to take part in equity appreciation.
If the Central Bank manages to generate less inflation in the future than it had in the past and interest rates remain low, a higher weighting in equities is needed for the fund to generate good returns.
But there had also been some concerns about the EPF's investment in the financial sector where the central bank as the regulator has 'inside' information.
Stocks markets however can go up as well as down in the short term. Sri Lanka's stocks are currently among the highest valued in the region compared to actual earnings of the firms and more time is needed for earnings to catch up to prices to prevent a steep correction.
Analysts say EPF activity in the market has also helped swell valuations.
Such actions can helping worsen asset-price bubbles Mississippi Corporation-style, complicating monetary policy and underscoring a greater need for independent management of the fund.
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