Budget 2015: Pushing up employer EPF contribution to 14%: Good or bad?

President Mahinda Rajapaksa presenting Budget 2015 said the Government had decided to increase the Employees’ Provident Fund (EPF) contribution from the employer from 12% to 14%. Some Government officials were quick to point out that in Singapore the employer contributes 16% to the CPF; it is also good to note that the employee contributes 20%.
According to the EPF Act, an employee is required to contribute a minimum of 8% and the employer a minimum of 12% of the total salary of the employee monthly to the EPF. Unlike many employers, many workers would have welcomed the proposal to increase the employer contribution to 14%, because it helps an average worker to financially secure his retirement.
A worker would now put away the equivalent of 25% (EPF 22% plus ETF 3%) annual base salary per year excluding gratuity (half a month of salary for every year of service after completing five years) annually. However, the concern for many young workers is how safe their contribution would be by the time they retire and in addition, the real value of their balance that will be available to use as retirement income.
On the other hand, for the employer the impact will be an increase in the labour cost by 2%. Raising the EPF contribution for the employers could have an adverse impact on private sector job creation and cost structures of firms operating on thin margins. Perhaps to cushion the impact the Government has also reduced taxes, which is a good move. The EPF, on the other hand, would see their contribution increasing by 10% monthly.
Provident Fund
EPF, which is under full State control, is the largest retirement fund of private sector workers. Lately it has come in for heavy criticism by many Opposition lawmakers and union leaders for making certain controversial investments.
EPF has invested about 92% of its funds in Government securities, 6% in stocks and 2% in corporate debt and short-term Government securities. The President, perhaps to mitigate some of the criticism levied against the fund, also proposed to distribute dividends to members of the Provident Fund who have over 10 years of active accounts. This is the first-ever dividend distribution by the EPF.
Today, what often concerns contributors to the fund is the limited benefits the EPF offers them during their working life, when compared with some of the well-managed superannuation funds globally that fund skills development, healthcare and provide effective housing benefits.
Alternative solutions
Considering the above, an option could have been for the Government to have asked employers to invest 2% more of an employee’s wages to a skills development fund and given a benefit of free skills training in Technical Colleges and State institutions to the private sector.
Given the significant changes in the workplace as a result of new and advanced technology, the skills training would have helped employees to remain employable during their working life and also helped to grow our nation’s skills base.
Another popular and viable option would have been to add the 2% to the ETF to give the fund more scale to provide members with more benefits during their working life. The ETF has private sector and trade union representatives on its Board and the institution was set up to assist workers during their working life, unlike the EPF which was set up to benefit an employee when they retire at 55 years or 60 years.
Furthermore, it may be also prudent for the Government to study its current and long-term funding options and the risks associated with managing the EPF in consultation with the private sector because any change that is proposed should not fundamentally alter the rights of workers over their current benefits (Gratuity and ETF) or the long-term benefit of receiving a lump sum at 55 years or 60 years.
The private sector could also benefit substantially through a form of an unemployment benefit scheme, which the current system can now fund with the additional 2%. That would help companies to restructure and become more competitive and for the economy to improve its competitiveness.
Therefore, in the final analysis, while the Government should be lauded for attempting to secure the retirement future of many low income workers who do not have the privilege of hefty bonuses and long-term options, what they however need to ensure is that the competitiveness of the private sector is not impacted negatively by this proposal.
Furthermore, driving up labour costs could also lead to more employers evading EPF, because we are already confronted with this issue as the President pointed out in his Budget speech that many people still either dispute or evade paying EPF contributions.
(The writer is a former Chairman of the Employees Trust Fund Board of Sri Lanka.)