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Reforming Pension Funds in Sri Lanka: International Diversification and the Employees’ Provident Fund

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Listed:
  • Ajantha Sisira Kumara

    (National Graduate Institute for Policy Studies)

  • Wade D. Pfau

    (National Graduate Institute for Policy Studies)

Abstract

The Employees’ Provident Fund (EPF) of Sri Lanka is a defined-contribution pension fund whose pooled asset holdings consist mainly of local government bonds. Regulations prohibit international diversification, and this paper aims to quantify the extent of the potential harms, if any, caused by this constraint. To improve the robustness of the findings, we use two distinct methodologies. These include traditional mean-variance analysis from modern portfolio theory, and Monte Carlo simulations that estimate the distribution of wealth accumulated at retirement from the contributions of a hypothetical worker. Both methods produce qualitatively and quantitatively similar results: workers with risk aversion varying from aggressive to conservative will be better served by allowing international diversification. The results are particularly persuasive for the second approach. The EPF fund managers will likely behave fairly conservatively toward risk, which suggests that around half of the fund assets should be invested abroad.

Suggested Citation

  • Ajantha Sisira Kumara & Wade D. Pfau, 2010. "Reforming Pension Funds in Sri Lanka: International Diversification and the Employees’ Provident Fund," GRIPS Discussion Papers 10-13, National Graduate Institute for Policy Studies.
    • Handle: RePEc:ngi:dpaper:10-13
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    1. Mr. Jorge A Chan-Lau, 2004. "Pension Funds and Emerging Markets," IMF Working Papers 2004/181, International Monetary Fund.
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    Cited by:

    1. Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.

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    More about this item

    Keywords

    International Diversification; Utility Maximization; EPF; Hypothetical Worker; Modern Portfolio Theory; Sri Lanka;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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