Retirement age: Flexibility is key for private sector competitiveness

The Cabinet of Ministers at its meeting on Monday according to Daily FT approved the Bill prepared by the Legal Draftsman’s Department to extend the retirement age in the private sector to 60 years from 55 years previously. 

The Government said the Bill had been subject to multiple stakeholder discussions initiated by the committee to study policy and legal matters impacting the private sector chaired by Prime Minister Mahinda Rajapaksa. 

According to the news item in the FT, the Bill has been prepared inclusive of provisions to extend the retirement age to 60 years with respect to employees who have not attained the age of 52 years on the effective date of the proposed Act. In the case of employees aged 52 years or above on the effective date of the proposed Act they will be employed up to a maximum of 59 years under three age groups.

Increase 

The proposal to increase the retirement age in the private sector was first proposed in the 2021 Budget presented in November last year. Thereafter the Cabinet in March this year approved the move for the Legal Draftsman’s Department to prepare the relevant Bill to amend the maximum age limit for retirement for private sector employees. Based on recommendation from the Prime Minister, the Cabinet of Ministers agreed on the proposal to present the Bill in Parliament for approval. 

The Prime Minister in the budget speech last year said: “It cannot be justified to have two different ages for compulsory retirement for men and women. The compulsory retirement age for the public sector is 60 years, whereas it is 50 years for the private sector. It is further lower for females. Contrary to this, life expectancy for females is 76.6 years and life expectancy for males is 72 years. Therefore, based on the life expectancy, it is proposed to amend the Employees’ Provident Fund Act to expand the retirement age for both men and women up to 60 years. I wish to also bring to your notice that at the time of the adoption of the Employees’ Provident Fund Act, life expectancy for females was as low as 57.5 years and life expectancy for males was 58.8 years.”

There is no law according to a labour law expert currently on retirement age contained in the EPF and ETF Acts. In the Gratuity Act the payment is made on cessation of employment if the employee has put in five years. This is available when the cessation of employment is for any cause. In the ETF Act at the end of a contract of employment an employee can withdraw his/her money in the fund, the only restriction is that you cannot withdraw your money except once every five years. 

Retirement age

Generally in the private sector retirement is in accordance with the letter of appointment or a collective agreement if one applies. There is no discrimination and men and women usually are expected to retire at 55 and some companies at 60. Where an employee wishes to continue and where the employer has work for the employee, the employee usually is happy to retire to take his EPF and ETF benefits and work again on a contract, which again entitles him to EPF and ETF as before.

According to the Termination of Employment (Special Provisions) Act of 1971, as amended, if the letter of appointment or a collective agreement does not specify an age of retirement, to make this possible the Labour Commissioner has to give his approval. There is no law as such according to the labour law expert that governs the retirement of private sector employees. Therefore the downside of these proposed changes is that the private sector would need to manage expensive and unproductive staff who have reached a level where retraining and reskilling becomes a challenge, especially for manufacturing exporters where HR costs are key to their survival. So a phased out program would help to soften the ever-increasing underlying costs for companies. 

Labour shortage

The shortage of labour in the factories is due to the fact that female employees wish to merely become eligible for gratuity and then take this money and go back to the villages. When they get married they also withdraw their EPF and ETF as well. Most female employees do not wish to remain till 60 years in the factories. Even now a female may work till 60 years and take her EPF at that age if the employer wishes to continue the employee till 60 years.

It may perhaps be correct that when a lower age was fixed for women to access their funds, it was assumed that the group of women who were kept in mind were the category of manual worker and 50 was a reasonable age at which they could opt to retire and stay at home given the heavy nature of their work. However there was nothing in a contract of employment which made retirement at 50 compulsory for females and they could have continued if they wished.

Whilst there are many benefits of extending the retirement age to 60 given the rise in mortality, Sri Lanka has perhaps the highest years spent in retirement (see graph) in the world. However the Government could be more sensitive of the timing given the devastation the pandemic has had on SMEs, the backbone of this country, it is estimated to be 80% of all businesses. 

Way forward 

Therefore an efficient labour market policy for SMEs will create a more coherent and pragmatic framework for these enterprises to survive the pandemic and grow. The other challenge is that the private sector would have to absorb a significant cost in their gratuity provisions, which would now be actuarially valued until the age of 60. In aggregate, the reduction in corporate tax could also be sizeable at a time tax revenues need to be grown. 

Sectors like apparel, plantations and large retailers, where scale contributes to affordable products and services, would be hit. This would significantly off set the gains in the aggregate EPF retentions. Therefore, some flexibility on both sides would help in the implementation of the proposed changes.

Source: IPS HPP Occasional Paper No.05