EMPLOYEES PROVIDENT FUND (EPF) MALAYSIA : Governance, Investment & Risk Management 1

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
EMPLOYEES PROVIDENT FUND
1
QuickTake on EPF (end 2006)
SIZE
IMPACT
PUBLIC
SCRUTINY
EPF members
- 11.36 million
Malaysian population
- 27 million
EPF’s assets 2006
- USD 83.16 billion
Real GDP 2006
- USD 79.57 billion
Economy/Society/Labour Markets /Savings
and Consumption Level
Trustee/Ownership
Note: USD 1 = RM 3.49
EMPLOYEES PROVIDENT FUND
2
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
3
BACKGROUND
Malaysia 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%
EMPLOYEES PROVIDENT FUND
4
BACKGROUND
Malaysia in Brief
Labour Force:
10.23 million
5.05 death/1,000 population
Mortality Rate:
Life Expectancy (at birth): Male: 71 years
Female: 76 years
Poverty Rate
5.7%
Hardcore Poverty Rate:
1.2%
EMPLOYEES PROVIDENT FUND
5
BACKGROUND
Social 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
EMPLOYEES PROVIDENT FUND
6
BACKGROUND
EPF’s 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
EMPLOYEES PROVIDENT FUND
7
BACKGROUND
History
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 nonpensionable public sector employees.
The employees and their employers pay monthly contributions
to the Fund and the contributions are then credited into the
individual member’s account to which interest or dividend is
added annually.
Employee’s
contributions
+
Employer’s
contributions
+
Dividend
EMPLOYEES PROVIDENT FUND
-
PreRetirement
Withdrawals
= =
RETIREMENT
SAVINGS
8
BACKGROUND
Main 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.
EMPLOYEES PROVIDENT FUND
9
BACKGROUND
Membership 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
EMPLOYEES PROVIDENT FUND
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BACKGROUND
Investment & 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
EMPLOYEES PROVIDENT FUND
11
BACKGROUND
Contribution & Withdrawal (Annual)
(RM Million)
30,000
27,952
25,251
25,000
21,968
21,860
20,056
20,000
20,143
18,172
16,847
15,083
15,121
15,000
12,727
13,403
13,423
2004
2005
11,501
9,991
10,000
7,124
5,000
0
1999
2000
2001
2002
WITHDRAWAL
EMPLOYEES PROVIDENT FUND
2003
2006
CONTRIBUTION
12
BACKGROUND
Coverage
Compulsory
- All private sector employees.
- Public sector employees(prior to be placed on pension
scheme and those who have opted for EPF’s scheme).
Voluntary
- Self - employed
- Domestic helpers
- Public sector employees
- Foreign workers
EMPLOYEES PROVIDENT FUND
13
BACKGROUND
Contribution Rate
YEAR
Percentage
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
5
5
10
- Jun 1975
Self employed persons can elect to contribute between RM 50.00 and RM 5000.00 per month.
EMPLOYEES PROVIDENT FUND
14
BACKGROUND
Structure of Members’ Account
From
1 Jan 2007
Before
1 Jan 2007
Account 1
(60% of savings)
Account 2
(30% of savings)
Account 3
(10% of savings)
EMPLOYEES PROVIDENT FUND
Account 1
(70% of savings)
Account 2
(30% of savings)
15
BACKGROUND
Benefit & 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.
 Member’s nominee/next-of-kin can withdraw upon member’s
death.
 When a members leaves the country permanently (revokes
his/her Malaysian citizenship).
EMPLOYEES PROVIDENT FUND
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BACKGROUND
Benefit & 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.
EMPLOYEES PROVIDENT FUND
17
BACKGROUND
Benefit & Withdrawal
5. Additional benefits:
 Death Benefit of RM2,500 is paid to the next-of-kin upon a
member’s death.
 Incapacitation Benefit of RM5,000 is paid to a member upon
Incapacitation.
(Provided the member has not attained age 55).
EMPLOYEES PROVIDENT FUND
18
BACKGROUND
Tax Incentive
Employee’s
share
of
EPF
contributions together with life
insurance premium of up to
RM6,000 is tax deductible.
Employer’s
share
of
EPF
contributions of up to 19% is tax
deductible.
EPF’s returns on investments are
not taxed.
All pre-retirement and retirement
withdrawals are not taxed.
EMPLOYEES PROVIDENT FUND
19
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
20
GOVERNANCE
Governance Structure
MINISTRY OF
FINANCE
INVESTMENT
PANEL
BOARD
MANAGEMENT
EMPLOYEES PROVIDENT FUND
21
GOVERNANCE
EPF 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)
EMPLOYEES PROVIDENT FUND
22
GOVERNANCE
Board Committees
Audit Committee
Finance and Development Committee
Establishment, Appointment and Service Committee
Disciplinary Committee
Risk Management Committee
Performance Management Committee
Promotion Committee
EMPLOYEES PROVIDENT FUND
23
GOVERNANCE
Investment 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.
EMPLOYEES PROVIDENT FUND
24
LEGAL DEPT.
GOVERNANCE
Management
Structure
PROPERTY DEPT.
OPERATION
DIVISION
PROCUREMENT DEPT.
ENFORCEMENT DEPT.
WITHDRAWAL DEPT.
CONTRIBUTION DEPT.
SERVICES
DIVISION
BRANCH NETWORK DEPT.
OPERATION INVT DEPT.
CEO
INVESTMENT
DIVISION
RESEARCH & SUPERVISION INVT DEPT.
EQUITY INVT DEPT.
IT DEPT.
Board Audit
Committee
FINANCE DEPT.
ORG. DEV
DIVISION
STRATEGIC PLANNING DEPT.
Board Risk
Committee
HUMAN RESOURCE DEPT.
EPF TRAINING INSTITUTE
INTERNAL AUDIT DEPT.
RISK MANAGEMENT DEPT.
EMPLOYEES PROVIDENT FUND
25
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
Group

Setting-up within EPF a dedicated unit to engage and
monitor public-listed companies on CG issues :
Minority Shareholder
Watchdog
• to attend and exercise proxy voting in companies’ AGM
and EGM.
• to collaborate with other institutional shareholders on CG
issues detrimental to institutional shareholders.
EMPLOYEES PROVIDENT FUND
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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.
EMPLOYEES PROVIDENT FUND
27
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
EMPLOYEES PROVIDENT FUND
28
CORPORATE COVERNANCE
STAKEHOLDERS COMMUNICATIONS
1.
Dissemination of Annual Statement of Accounts to
Members
2.
Tabling of Annual Report in Parliament
3.
Advertising Annual Report in the News Papers
4.
Advertising Quarterly Performance Reports in the News
Papers
5.
Dialogue Sessions with Companies that the EPF holds
Substantial Stocks
EMPLOYEES PROVIDENT FUND
29
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
30
INVESTMENT
The 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;
EMPLOYEES PROVIDENT FUND
31
INVESTMENT
The 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, banker’s acceptances, money
market papers, private debt securities, and promissory
notes.
(d) To provide loans to Federal or State Government.
EMPLOYEES PROVIDENT FUND
32
INVESTMENT
The Power of Board to Invest
2.
The Board with the approval of the Minister may invest the
Fund’s moneys:
a)
Deposited in any bank or financial institution established
by or under written law;
b)
Joint venture;
c)
Privatization programme;
d)
provide loans to any company incorporated under the
Companies Act 1965;
e)
Investment outside Malaysia
EMPLOYEES PROVIDENT FUND
33
INVESTMENT
Growth of Asset from Year 1985 –2006 (in Ringgit Malaysia)
350
290.3
300
265.2
250
222.2
200
186.9
RM
(million)
163.8
150
132.4
98.72
100
72.67
53.22
50
24.55
31.19
41.23
0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2006
YEAR
EMPLOYEES PROVIDENT FUND
34
INVESTMENT
Asset Allocation
MGS &
Equivalent 39.5%
Money Market
Instruments 4%
Loans & Bonds 9%
Equity 3%
Internal Equity
(International)
1.1%
Private Equity
0.05% Loans/bond
28.8%
MGS &
Equivalent
84%
Equity External
Managers
1985: USD 7.53 billion (Domestic) 3.1%
Internal Equity
(Domestic) 16.7%
Over the years, EPF has expanded its investments from traditional
assets being Government Bonds to risky assets..
Money Market
Instruments 4%
Fixed Income
Managers 2%
6/2007: USD90.34 billion
EMPLOYEES PROVIDENT FUND
35
INVESTMENT
Managed In-House & Outsourced
MGS &
Internal Equity
Private Equity
Equivalent 39.5% (International) 1.1%
0.05%
Outsourced 5.5%
Loans/bond
28.8%
In House 94.5%
Equity External
Managers
(Domestic) 3.1%
Internal Equity
(Domestic) 16.7%
Fixed Income
Managers 2%
Money Market
Instruments 4%
6/2007: USD90.34 billion
EMPLOYEES PROVIDENT FUND
36
INVESTMENT
Governance
EPF
BOARD
EPF ACT 1991
SECTION 18 - provides for the
establishment of the Investment
Panel and specifies its members
SECTION 26 - confers powers to
invest
EMPLOYEES PROVIDENT FUND
MINISTRY OF
FINANCE
INVESTMENT
PANEL
MANAGEMENT
INVESTMENT
COMMITTEE
INVESTMENT
OPERATION
37
INVESTMENT
Dividend 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
EMPLOYEES PROVIDENT FUND
38
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
39
RISK MANAGEMENT
Enterprise Risk Framework
Strategic Risk
Credit Risk
Market Risk
Investment Risk
Operational Risk
Liquidity Risk
Regulatory Risk
Reputation Risk
EMPLOYEES PROVIDENT FUND
40
RISK MANAGEMENT
Risk 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 EPF’s 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 EPF’s stakeholders and the public in general.
EMPLOYEES PROVIDENT FUND
41
RISK MANAGEMENT
Risk Management in the EPF
Strengthening EPF’s competitive strategy and
efficiency to increase long-term stakeholders’ value.





operational
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.
EMPLOYEES PROVIDENT FUND
42
Employees Provident Fund
Assurance Framework
Ministry of Finance
Investment Panel
Board Risk
Management
Committee
Investment Panel
Risk Committee
Management
Risk
Committee
Investment
Risk
Management
Section
Board of Directors
Risk
Management
Department
Management
Operations
Risk
Committee
Board Audit
Committee
Internal
Audit
External
Audit
Operational
Risk
Management
Section
EMPLOYEES PROVIDENT FUND
43
RISK MANAGEMENT
Who 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 enterpriselevel policy.
EMPLOYEES PROVIDENT FUND
44
RISK MANAGEMENT
Who 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.
EMPLOYEES PROVIDENT FUND
45
RISK MANAGEMENT
Key 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.
EMPLOYEES PROVIDENT FUND
46
ENSURING IMPLEMENTATION AND ACCOUNTABILITY
BALANCED SCORECARD- EPF CORPORATE STRATEGY MAP
Common Obj
F2: Effective Cost
Management
F1: Optimize Return
P1 :: Continuous
Improvements
and innovations
P2: Enhanced
Customer/
Stakeholder
Communication
CS3:Enhance Policy
input on Malaysia’s
Retirement Scheme
P3 : Enhance
Strategic
Alliances
P4 : Employer
Compliance
P5 :Compliance
To Risk
Management
Framework
LEARNING & GROWTH
DRIVERS
INTERNAL PROCESS
CS2:Practice good
Corporate Governance
Shared Obj.
IPLANNED OUTCOMES
CS1:Maximise Value for
Customer
FINANCIAL
CUSTOMER/STAKE
HOLDER
Vision: To be a leading social security
organisation in the world and the best
government agency in Malaysia
L1
Internalisation of corporate
culture
• Performance based
• Knowledge sharing
• Customer centric
• Continuous innovation
EMPLOYEES PROVIDENT FUND
L2:
Enhanced Human Capital
47
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
48
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.
EMPLOYEES PROVIDENT FUND
49
CHALLENGES
3.
Health-care benefits not available during retirement.
4.
Member changing retirement needs.
5.
Changing of family support system (members may not
get financial assistance from family during retirements).
6.
Increasing size of fund.
7.
Low interest rate regime.
EMPLOYEES PROVIDENT FUND
50
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
51
WAY FORWARD
Enhance Customer Experience
Adequacy and Coverage of Scheme
Human Capital Development
Technology Innovation
Business Process Reengineering (BPR),
Core System Replacement (CSR), EServices & 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
EMPLOYEES PROVIDENT FUND
52
PRESENTATION ROADMAP
Background
Governance
Investment
Risk Management
Challenges
Way Forward
Questions & Answers
EMPLOYEES PROVIDENT FUND
53
[email protected]
EMPLOYEES PROVIDENT FUND
54