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

Ajantha Kumara () and Wade Pfau

No 10-13, GRIPS Discussion Papers from 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.

Keywords: International Diversification; Utility Maximization; EPF; Hypothetical Worker; Modern Portfolio Theory; Sri Lanka (search for similar items in EconPapers)
JEL-codes: G11 G23 H55 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-09
New Economics Papers: this item is included in nep-age
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: REFORMING PENSION FUNDS IN SRI LANKA: INTERNATIONAL DIVERSIFICATION AND THE EMPLOYEES' PROVIDENT FUND (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ngi:dpaper:10-13

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