EMPLOYEES%20PROVIDENT%20FUND%20(EPF)%20MALAYSIA%20:

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EMPLOYEES PROVIDENT FUND (EPF) MALAYSIA
Governance, Investment Risk Management
by R. VIJAYA KUMAR Head, Strategic Planning
Department Employees Provident Fund
APEC Workshop on Meeting The Challenges of Ageing
Society, Shanghai, China.
October 16-17, 2007
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QuickTake on EPF (end 2006)
EPF members - 11.36 million Malaysian population
- 27 million EPFs assets 2006 - USD 83.16
billion Real GDP 2006 - USD 79.57 billion
SIZE
Economy/Society/Labour Markets /Savings and
Consumption Level
IMPACT
PUBLIC SCRUTINY
Trustee/Ownership
Note USD 1 RM 3.49
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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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BACKGROUNDMalaysia in Brief
Population (2005) 26.75 Million
Population Growth Rate 1.78
Ethnic Groups Malay 50.4 Chinese 23.7 Indigenous 11 Indian 7.1 Others 7.8
GDP (2006) USD 308.8 Billion
GDP Growth Rate 5.5
Percapita Income USD 2,700.00
Unemployment Rate (2006) 3.5
Inflation Rate (2006) 3.8
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BACKGROUNDMalaysia in Brief
Labour Force 10.23 million
Mortality Rate 5.05 death/1,000 population
Life Expectancy (at birth) Male 71 years Female 76 years
Poverty Rate 5.7
Hardcore Poverty Rate 1.2
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BACKGROUNDSocial Security System in Malaysia
Social Security Benefits
Benefit Organisation
Retirement Public Service Pension Scheme Employees Provident Fund (EPF) Armed Force Provident Fund
Employment Injury Invalidity Social Security Organisation (SOCSO)
Social Assistance Social Welfare Department
Health Care Ministry of Health
Others Workmen Compensation Scheme 1952 Employment Act 1955
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BACKGROUNDEPFs Vision, Mission and Values
Customer First
Vision To be a leading social security
organization in the world and the best
government agency in Malaysia
Continuous Improvement
Teamwork
Mission Provide retirement benefits to members
convenient system to employers challenging
working environment to employees and
socio-economic development to the nation
Integrity
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BACKGROUNDHistory

• The EPF was established on 1 October 1951.
• It is governed by the EPF Act 1991.
• The EPF is a national compulsory savings scheme.
• It provides retirement benefits for the private
  sector and non-pensionable public sector
  employees.
• The employees and their employers pay monthly
  contributions to the Fund and the contributions
  are then credited into the individual members
  account to which interest or dividend is added
  annually.

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BACKGROUNDMain Functions

• To receive and recover contributions.
• To maintain members and employers accounts.
• To invest the funds.
• To return the savings to members through the
  various withdrawal options.

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BACKGROUNDMembership Growth, No. of Active
Members Employer Growth
Year No. of Members (million) No. of Active Members (million) No. of Employers
2006 11.36 5.39 409,911
2005 11.05 5.23 394,359
2004 10.71 5.07 372,741
2003 10.42 4.91 355226
2000 9.97 5.04 318,218
1990 5.94 2.94 174,289
1980 3.76 2.82 109,658
1970 1.96 1.57 58,000
1960 1.14 1.03 15,874
1952 0.52 0.50 11,918
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BACKGROUNDInvestment Assets


Year Cumulative Investments (RM Million) Annual Gross Income (RM Million) Cumulative Assets (RM Million)
6/2007 306,410
2006 285,451 13,299 290,255
2005 253,968 12,773 263,865
2004 237,106 11,758 240,362
2003 217,051 11,046 220,161
2000 179,047 10,542 181,518
1990 45,642 3,259 46,680
1980 9,261 637 9,481
1970 2,193 119 2,240
1960 629 31 633
1952 17 0 28
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BACKGROUNDContribution Withdrawal (Annual)
(RM Million)
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BACKGROUNDCoverage

• Compulsory
• - All private sector employees.
• - Public sector employees(prior to be placed on
  pension scheme and those who have opted for EPFs
  scheme).
• Voluntary
• - Self - employed
• - Domestic helpers
• Public sector employees
• Foreign workers

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BACKGROUNDContribution Rate
YEAR Percentage Percentage Percentage
YEAR EMPLOYEE EMPLOYER TOTAL
Jun 2004 - present 11 12 23
Jun 2003 May 2004 9 12 21
Apr 2002 - May 2003 11 12 23
Apr 2001 - Mar 2002 9 12 21
Jan 1996 - Mar 2001 11 12 23
Jan 1993 - Dec 1995 10 12 22
Dec 1980 - Dec 1992 9 11 20
July 1975 - Nov 1980 6 7 13
1952 - Jun 1975 5 5 10
Self employed persons can elect to contribute
between RM 50.00 and RM 5000.00 per month.
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BACKGROUNDStructure of Members Account
From 1 Jan 2007
Before 1 Jan 2007
Account 1 (70 of savings)
Account 2 (30 of savings)
Account 1 (60 of savings)
Account 2 (30 of savings)
Account 3 (10 of savings)
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BACKGROUNDBenefit Withdrawal

• 1. Retirement withdrawals
• On attaining age 55 years a member can
  choose to do any of the following
• withdraw total savings in lump sum,
• withdraw total savings monthly, or
• part of the savings in lump sum and the balance
  on a monthly basis.

• 2. Other full withdrawals
• A member can withdraw all the savings
• When a member is permanently incapacitated.
• Members nominee/next-of-kin can withdraw upon
  members death.
• When a members leaves the country permanently
  (revokes his/her Malaysian citizenship).

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BACKGROUNDBenefit Withdrawal

• 3. Pre-retirement withdrawals
• A member can withdraw part of the savings
• To purchase/build and to reduce housing-mortgage
  loan.
• On attaining 50 years of age.
• For health care and.
• For education of members and members children.
• 4. Members Investment Scheme
• Members who have savings of at least RM 55,000 in
  Account I can invest 20 of the savings in excess
  of RM 50,000 through approved external fund
  managers.
• The investment can be made at intervals of 3
  months.

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BACKGROUNDBenefit Withdrawal

• 5. Additional benefits
• Death Benefit of RM2,500 is paid to the
  next-of-kin upon a members death.
• Incapacitation Benefit of RM5,000 is paid to a
  member upon Incapacitation.
• (Provided the member has not attained age
  55).

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BACKGROUNDTax Incentive

• Employees share of EPF contributions together
  with life insurance premium of up to RM6,000 is
  tax deductible.
• Employers share of EPF contributions of up to
  19 is tax deductible.
• EPFs returns on investments are not taxed.
• All pre-retirement and retirement withdrawals are
  not taxed.

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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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GOVERNANCEGovernance Structure
MINISTRY OF FINANCE
INVESTMENT PANEL
BOARD
MANAGEMENT
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GOVERNANCEEPF Board

• The EPF Board is a statutory body under the
  Ministry of Finance.
• The Board formulates policies and guidelines and
  ensures their implementation.
• The Board comprises
• - Chairman
• - Deputy Chairman
• - 5 representatives of the government (inclusive
  of the Deputy Chairman)
• - 5 representatives of the employees
• - 5 representatives of the employers
• - 3 professionals
• - Chief Executive Officer (ex-officio)

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GOVERNANCEBoard Committees

• Audit Committee
• Finance and Development Committee
• Establishment, Appointment and Service Committee
• Disciplinary Committee
• Risk Management Committee
• Performance Management Committee
• Promotion Committee

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GOVERNANCEInvestment Panel

• The Investment Panel is responsible for the
  investment of the funds.
• The Panel consists of
• - Chairman
• - 1 representative of the Ministry of Finance
• - 1 representative of the Central Bank
• - 3 experts in finance and investment
• - Chief Executive Officer (ex-officio)
• Members of the Board and Investment Panel are
  appointed by the Minister of Finance.

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LEGAL DEPT.
GOVERNANCEManagement Structure
OPERATION DIVISION
PROPERTY DEPT.
PROCUREMENT DEPT.
ENFORCEMENT DEPT.
WITHDRAWAL DEPT.
SERVICES DIVISION
CONTRIBUTION DEPT.
BRANCH NETWORK DEPT.
OPERATION INVT DEPT.
INVESTMENT DIVISION
CEO
RESEARCH SUPERVISION INVT DEPT.
Board
EQUITY INVT DEPT.
IT DEPT.
Board Audit Committee
ORG. DEV DIVISION
FINANCE DEPT.
STRATEGIC PLANNING DEPT.
Board Risk Committee
HUMAN RESOURCE DEPT.
EPF TRAINING INSTITUTE
INTERNAL AUDIT DEPT.
RISK MANAGEMENT DEPT.
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CORPORATE GOVERNANCE

• The EPF is the single largest institutional
  investor in Malaysia.
• EPF has ensured that the companies in which it
  has invested practice good Corporate Governance
  (CG)
• Establishing the Minority Shareholder Watchdog
  Group
• Setting-up within EPF a dedicated unit to
  engage and monitor public-listed companies on CG
  issues
• to attend and exercise proxy voting in companies
  AGM and EGM.
• to collaborate with other institutional
  shareholders on CG issues detrimental to
  institutional shareholders.

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CORPORATE GOVERNANCE

• Whilst advocating CG in companies the EPF
  invests, it is also crucial for the EPF itself to
  practice good CG.
• Good CG practices will ensure integrity, optimal
  performance and instill confidence of our
  stakeholders in EPF.
• In EPF, we have adopted CG practices as one of
  the key performance measures in our Balanced
  Scorecard.
• We have designed a CG Index to measure and
  monitor the implementation of good CG practices.

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CORPORATE GOVERNANCE Corporate Governance
Measure- CG Index

• The key components of the CG Index
• Transparency
• Independence
• Accountability
• Focus
• Risk Management
• Regulatory Compliance
• Fairness
• Social Awareness
• Responsibility
• Environmental Responsibility

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CORPORATE COVERNANCESTAKEHOLDERS COMMUNICATIONS

• Dissemination of Annual Statement of Accounts to
  Members
• Tabling of Annual Report in Parliament
• Advertising Annual Report in the News Papers
• Advertising Quarterly Performance Reports in the
  News Papers
• Dialogue Sessions with Companies that the EPF
  holds Substantial Stocks

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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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INVESTMENTThe Power of Board to Invest

• 1. The Board may subject to subsection 18 (2) of
  the EPF Act 1991 invest moneys belonging to the
  Fund in the following manner
• (a) To be deposited in
• Central Bank of Malaysia
• Bank licensed under the Banking and Financial
  Institutions Act 1989 (Act 372)
• Any other financial intuition duly licensed under
  the Banking and Financial Institutions Act 1989
  and approved by the Minister

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INVESTMENTThe Power of Board to Invest

• (b) To be invested in
• Shares of any public company listed on the stock
  exchange established in Malaysia
• Debentures of any public company
• (c) To be invested in
• Malaysian Government Securities
  (MGS), bonds, mortgage papers, commercial
  notes, bankers acceptances, money market papers,
  private debt securities, and promissory notes.
• (d) To provide loans to Federal or State
  Government.

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INVESTMENTThe Power of Board to Invest

• The Board with the approval of the Minister may
  invest the Funds moneys
• Deposited in any bank or financial institution
  established by or under written law
• Joint venture
• Privatization programme
• provide loans to any company incorporated under
  the Companies Act 1965
• Investment outside Malaysia

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INVESTMENTGrowth of Asset from Year 1985 2006
(in Ringgit Malaysia)
RM (million)
YEAR
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INVESTMENTAsset Allocation
Internal Equity (International) 1.1
MGS Equivalent 39.5
Money Market Instruments 4
Private Equity 0.05
Loans/bond 28.8
Equity 3
Loans Bonds 9
MGS Equivalent 84
Equity External Managers (Domestic) 3.1
1985 USD 7.53 billion
Money Market Instruments 4
Internal Equity (Domestic) 16.7
Fixed Income Managers 2
Over the years, EPF has expanded its investments
from traditional assets being Government Bonds to
risky assets..
6/2007 USD90.34 billion
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INVESTMENTManaged In-House Outsourced
Private Equity 0.05
Internal Equity (International) 1.1
MGS Equivalent 39.5
Outsourced 5.5
Loans/bond 28.8
In House 94.5
Equity External Managers (Domestic) 3.1
Fixed Income Managers 2
Money Market Instruments 4
Internal Equity (Domestic) 16.7
6/2007 USD90.34 billion
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INVESTMENTGovernance
MINISTRY OF FINANCE
INVESTMENT PANEL
EPF BOARD
 
MANAGEMENT INVESTMENT COMMITTEE
EPF ACT 1991 SECTION 18 - provides for the
establishment of the Investment Panel and 
specifies its members
SECTION 26 - confers powers to invest
INVESTMENT OPERATION
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INVESTMENTDividend Rates
YEAR NOMINAL DIVIDEND RATE INFLATION RATE REAL DIVIDEND RATE
2006 5.15 3.60 1.55
2005 5.00 3.00 2.00
2004 4.75 1.40 3.35
2003 4.50 1.20 3.30
2002 4.25 1.80 2.45
2001 5.00 1.40 3.60
2000 6.00 1.60 4.40
1999 6.84 3.00 3.84
1998 6.70 5.30 1.40
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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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RISK MANAGEMENTEnterprise Risk Framework
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RISK MANAGEMENTRisk Management in the EPF

• Increase risk awareness at all level of staff in
  order for them to effectively perform risk
  identification, measurement, control and on-going
  monitoring.
• Enable EPFs BOD to comply with its
  organisational obligations and duties of care and
  diligence in accordance with the Malaysian Code
  on Corporate Governance (MICCG).
• Accountability, assurance and governance
  Maintain integrity and confidence amongst EPFs
  stakeholders and the public in general.

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RISK MANAGEMENTRisk Management in the EPF

• Strengthening EPFs competitive strategy and
  operational efficiency to increase long-term
  stakeholders value.
• Safeguarding assets and resources.
• Exploitation of opportunities.
• Improved planning, performance and effectiveness.
• Improved information for decision making.
• Minimise unexpected impact on earnings and
  returns to Members.
• Staff personal well-being.

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Employees Provident FundAssurance Framework
Ministry of Finance
Investment Panel
Board of Directors
Investment Panel Risk Committee
Board Risk Management Committee
Board Audit Committee
Management Risk Committee
Risk Management Department
Management Operations Risk Committee
Internal Audit
External Audit
Operational Risk Management Section
Investment Risk Management Section
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RISK MANAGEMENTWho manages risk?
Board of Directors Provides oversight
Board Risk Management Committee Approve risk management policies. Evaluate management of risks. Big Picture analysis of risk trends.
Senior Management Manage and monitors risk
Executive Committee Special Committee (MORC and MRC) to assist Senior Management monitors risk.
Audit and Compliance Audit Provide independent assurance. Compliance Provides independent review.
Risk Management Department Assist in setting policies and standards that reflect the risk appetite of the organisation.
Business Units Responsible for owning and managing risk. Set and implement policy consistent with enterprise-level policy.
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RISK MANAGEMENTWho manages risk in business
units?
Risk scorecard owner Responsible for risk management in department/state office/branches/section/unit. To report effectiveness of risk management activities to MORC and/or BRMC.
Risk owner Responsible to manage assigned risk by ensuring effectiveness controls and to recommend new Management Action Plans (MAP) to mitigate risk. Recommend risk rating to Risk Scorecard Owner.
Control owner Responsible to ensure effectiveness of control. To report on control effectiveness to Risk owner.
Management Action Plan (MAP) owner To ensure MAP is carried out as planned to mitigate risk. To report on MAP status to risk owner.
Risk Champion Coordinator and risk advisor. Assist risk scorecard owner and other owners on risk management.
Individual staff Aware about risk and risk management. To highlight any new key risks to risk champion and/or risk scorecard owner.
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RISK MANAGEMENTKey Success Factors

1. Full support from the Board, Investment Panel,
   CEO and Management.
2. Committed Risk Champion.
3. Competence and committed consultant.
4. Effective Project Management.
5. Risk Awareness Training and Facilitation
   Workshop.
6. Computerised System.
7. Organisation culture.

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ENSURING IMPLEMENTATION AND ACCOUNTABILITY
BALANCED SCORECARD- EPF CORPORATE STRATEGY MAP
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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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CHALLENGES

• 1. Adequacy of retirement savings
• a) Low savings In 2006, average savings at age
  54 for
• Active members RM114,403 (USD 32,780)
• Inactive members RM 21,479 (USD 6,154)
• Male members RM 129,563 (USD 37,124)
• Female members RM 81,483 (USD 23,347)
• b) Increase in life expectancy (at birth)
• 2000 71.3 (M) 75.9 (F)
• 2006 71.4 (M) 76.0 (F)
• 2020 75.4 (M) 80.4 (F)
• 2. Method of withdrawal payments
• Lump sum may use up money in a short period of
  time.

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CHALLENGES

1. Health-care benefits not available during
   retirement.
2. Member changing retirement needs.
3. Changing of family support system (members may
   not get financial assistance from family during
   retirements).
4. Increasing size of fund.
5. Low interest rate regime.

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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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WAY FORWARDEnhance Customer Experience Adequacy
and Coverage of Scheme Human Capital Development
Technology Innovation Business Process Reengineering (BPR), Core System Replacement (CSR), E-Services Customer Delivery.
Incremental Innovation On-going benefit and service improvements. (Revamping of the EPF benefit scheme at administration)
Business Model Innovation New EPF Scheme for new members.
New Venture Innovation Multi-pillar approach
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PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions Answers
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Thank You
vijay_at_epf.gov.my