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

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Author Info

  • 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.

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Bibliographic Info

Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 10-13.

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Length: 22 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:ngi:dpaper:10-13

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Related research

Keywords: International Diversification; Utility Maximization; EPF; Hypothetical Worker; Modern Portfolio Theory; Sri Lanka;

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  1. Jorge A. Chan-Lau, 2004. "Pension Funds and Emerging Markets," IMF Working Papers 04/181, 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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