Business
Easing Sri Lanka’s fiscal burden: Who needs a state pension?
Priyanka Jayawardena is a Research Economist at IPS with research interests in skills and education, demographics, health, and labour markets. Priyanka has around 15 years of research experience at IPS. She has worked as a consultant to international organisations including World Bank, ADB and UNICEF. She holds a BSc (Hons) specialised in Statistics and an MA in Economics, both from the University of Colombo. (Talk with Priyanka – priyanka@ips.lk)
By Priyanka Jayawardena
Public sector workers’ pensions are paid by tax revenue, with 12% of government revenue allocated for pensions.
An IPS analysis shows that public service pensions are not a progressive welfare programme, with half of the publicly funded pensions benefitting the top 20% wealthier group.
Implementing a contributory pension fund is crucial to creating a more sustainable and equitable retirement system.
The recent economic crisis has highlighted the need to address weaknesses in Sri Lanka’s economic policies for long-term structural change. One significant issue is the financial burden of public sector pensions. The Public Services Pensions (PSP) is the largest pension scheme for permanent public sector employees in Sri Lanka. However, its non-contributory nature has become a critical burden on the country, wherein pension benefits are funded directly from government revenue, supported by general taxation. With around 700,000 public sector pensioners, this system places a significant financial burden on the government. On top of that, an IPS analysis reveals that public service pensions are not a progressive welfare programme, with half of the pension benefitting the top 20% income bracket. Such obligations further exacerbate inefficient fiscal policies, constraining resources available for crucial areas like health and education services. This blog aims to provide a comprehensive overview of the current challenges and potential solutions for easing the pension burden in Sri Lanka.
Understanding the Current Pension Burden
As of 2023, the total PSP payments amounted to LKR 372.3 billion, which accounted for 7.9% of the government’s recurrent expenditure and 12.1% of its revenue. With over 1.35 million public sector employees, the financial demands are increasing, particularly for new pensioners who receive higher payments than existing and deceased pensioners. For example, the total pension payments have increased by 20.5% in 2023 mainly due to the net increase in the number of pensioners by 4.2%. This situation is unsustainable, particularly in light of the country’s constrained fiscal capacities.
Who Benefits from the Pensions?
The better-off people enjoy the lion’s share of the PSP benefits. Employing a framework developed by the Commitment to Equity (CEQ), the distributional analysis shows that around 50% of PSP benefits go to individuals in the top 20% income bracket, while only 11% of the benefits reach the bottom 40% (Figure 1). This is mainly because PSP beneficiaries are from the better-off segment – around 44% of PSP receivers belong to the wealthiest 20% of the population. . This analysis clearly shows that PSP is not a pro-poor spending programme.
Furthermore, public service sector workers represent 15% of the employed population and benefit from secure, stable incomes throughout their careers, unlike the 67% of Sri Lankans in informal, unstable employment. This raises the question: Should the government shoulder the social security of the most stable public sector employees?
Proposed National Contributory Pension Fund for Easing the Pension Burden
To address these challenges, the government has initiated the establishment of a Contributory Pension Fund to ensure an appropriate environment in which to spend pensioners’ retirement without burdening the country’s budget. The proposed fund would require contributions from employees and the government, creating a more sustainable financial structure for pension payments. Specifically, it is proposed that 8% of the employee’s basic salary and 12% from the government be credited to this fund. The proposed national contributory pension scheme would apply to individuals newly recruited to the government service.
Way Forward: The Role of Policy and Legislation
Addressing the PSP burden in Sri Lanka requires a multifaceted approach that includes structural reforms and a shift towards a contributory pension system. By implementing these changes, Sri Lanka can create a more sustainable and equitable retirement system that balances the needs of both current and future generations.
Establishing a National Contributory Pension Fund: Effective implementation of the proposed Contributory Pension Fund requires strong policy and legislative support. Although a contributory pension scheme was implemented in 2003 to strengthen the state finances, it was revoked in 2006. The government must enact laws that mandate contributions and regulate pension fund management. Regular reviews and adjustments to the pension system should be conducted to adapt to changing demographic and economic conditions.
Gradual transition to contributory scheme: Implementing a gradual transition from the current non-contributory system to a contributory scheme can help mitigate immediate financial constraints while setting the stage for long-term sustainability. New public sector employees could be enrolled in the contributory scheme, while existing employees might have the option to switch voluntarily, with appropriate incentives.
Enhancing pension fund management: Efficient management of pension funds is crucial for ensuring their sustainability. This includes adopting best investment management practices to ensure the funds generate adequate returns. Transparent and accountable governance structures should be established to oversee the management of these funds.
This blog is drawn from an analysis of ‘Progressivity and Pro-poorness of Taxes and Welfare Spending’ in the forthcoming Sri Lanka: State of the Economy 2024 report published by the IPS.
Business
GDP data reaffirms persistent asymmetry of Sri Lanka’s provincial economy
Western Province maintains its dominant position, accounting for 42.4% of nominal GDP
The 2024 provincial GDP data reaffirms the profound and enduring structural asymmetry in Sri Lanka’s economic geography. The Western Province continues to function as the nation’s overwhelming economic core, while the second and third runners-up, the North Western and Central Provinces respectively, operate on a markedly different scale and sectoral foundation.
The Western Province maintains its dominant position, accounting for 42.4% of the country’s nominal GDP. This preeminence is rooted in its commanding role across the high-value Services and Industry sectors, where it contributes 44.5% and 47.6% of national output, respectively. Its economy is distinctively modern, with a scant 2.3% reliance on agriculture and over 98% of its output derived from industry and services. This concentration of finance, trade, administration, and manufacturing creates an unmatched gravitational pull for investment and talent.
In stark contrast, the combined economic share of the North Western (11.5%) and Central (10.7%) Provinces is just over half that of the Western Province alone. Their paths to relevance are fundamentally different. The North Western Province has solidified its role as the nation’s agricultural heartland, contributing a full 20.0% of national agricultural activity. It also holds a significant, though secondary, position in industry at 12.0%. Its internal economic composition is more balanced across sectors than the west, with a notable reliance on industry (29.1% of its own GDP) alongside agriculture.
The Central Province, meanwhile, presents a more services-oriented profile among the runners-up, contributing 10.7% to the national services total. It also holds important shares in agriculture (13.9%) and industry (9.6%). Internally, its economy mirrors the national structure most closely among major provinces, with services constituting about 63% of its output. This suggests a diversified regional economy centered on urban hubs like Kandy, but one that lacks the concentrated high-end service power of Colombo.
The comparative analysis reveals a clear hierarchy. The Western Province is the integrated, metropolitan driver of the modern economy. The North Western Province serves as a vital agro-industrial base, and the Central Province as a diversified regional center. Despite a noted increase in the combined share of the other provinces, the gap remains vast. The economic landscape is thus characterized not by convergence, but by a persistent and specialized asymmetry, where the runners-up support the national economy through different, but essential, sectoral strengths, all while operating in the long shadow of the western province.
by Sanath Nanayakkare
Business
Sri Lanka Insurance supports 1,000 families in flood-affected areas
Sri Lanka Insurance Life and Sri Lanka Insurance General, in collaboration with the National Disaster Relief Services Centre (NDRSC), extended vital assistance to 1,000 families affected by the recent ‘Ditwah’ cyclone. The relief initiative was carried out in two phases on 30th November and 2nd December 2025, reflecting the company’s continued commitment to supporting communities in times of distress.
Dry ration packs were distributed through the NDRSC to the Maharagama Urban Council and the Divulapitiya Pradeshiya Sabha, ensuring that aid reached the most affected households swiftly and efficiently. Both distribution programmes were held with the participation of local authorities and the management teams of SLIC Life and SLIC General, further strengthening the company’s close partnership with the communities it serves.
Speaking on the initiative, Chairman of Sri Lanka Insurance, Nusith Kumaaratunga, stated; “Sri Lanka Insurance has always placed community wellbeing at the heart of its purpose. In difficult times such as these, it is our responsibility to stand with the families who have been affected and offer meaningful support. This relief effort reflects our ongoing commitment to uplift communities and reinforces our role as a trusted national insurer focused on protection, care, and compassion.”
In addition to the relief programme, Sri Lanka Insurance has implemented extended operating hours at selected SLIC General branches in the affected areas to ensure uninterrupted service. Claims, customer care teams, and branch staff are working beyond regular hours to provide prompt assistance to policyholders impacted by the severe weather conditions.
Sri Lanka Insurance remains dedicated to safeguarding its customers and supporting communities across the nation, reaffirming its longstanding promise of protection, stability, and service excellence.
Business
Jaffna Hindu College wins regional AIA Healthiest Schools award
Jaffna Hindu College was named as one of the winners at the regional award ceremony of the prestigious AIA Healthiest Schools Competition, a flagship initiative by AIA Group aimed at promoting healthier habits among students across Asia-Pacific region through innovative school-based projects. The competition, which drew a record number of entries from eight regional markets, recognises schools that implement innovative and impactful initiatives in the areas of healthy eating, active living, mental wellbeing, and sustainability. Jaffna Hindu College stood out in the Active Lifestyles Award Category for its creative and community-focused project that introduced a bicycle rental system, ensuring greater access to physical activity for all students and encouraging healthier lifestyles across the region.
The winners of AIA Healthiest Schools programme were honoured at a vibrant regional awards ceremony in Da Nang, Vietnam, where the prize money was awarded to the respective schools to support the ongoing health and wellbeing initiatives.
The Cycling Club was introduced to make physical activity accessible and enjoyable for all students. The club introduced a bicycle rental system, managed via a custom software platform, ensuring equitable access regardless of financial background. Students participated in a cycle parade and three themed challenges focused on endurance, speed, and teamwork. The initiative quickly became popular, engaging over 100 students and receiving enthusiastic support from teachers, parents, and local businesses. Experienced cyclists from the community volunteered as coaches, while cycling organisations provided safety training and route planning.
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