GRIPS 政策研究センター Policy Research Center

客員研究員

Sep 1, 2010 Report No:10-13

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

Author
  • Pfau WadeGRIPS
  • Ajantha Sisira KumaraGRIPS
Field Economics
Language English
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
attachment 10-13.pdf