CASE STUDY 2 : NEW EPF RULES

New EPF rules… good for retirement, bad for unit trust industry

Malaysia's largest pension fund has decided to raise the minimum savings for its contributors to
ensure they have more money in their twilight years, but this indirectly cuts investments into the
country's vibrant unit trust industry.

The new rules by the Employees’ Provident Fund (EPF) to cut investments in unit trusts comes at
a time when rising costs have shown contributors' savings are not enough to cover retirement after
turning 55, five years below Putrajaya's new retirement age of 60.

The EPF will revise upwards the basic savings quantum of its members to RM196,800 by the age
of 55 effective January 2014, to ensure enough savings to finance members' retirement needs told
by EPF general manager, Nik Affendi Jaafar

He revealed that under the old scheme, which was launched in 2008, members' targeted savings of
RM120,000 at the age of 55 was not sufficient for them to maintain their lifestyle during
retirement. But the new amount will be equal to RM820 a month for 20 years from age 55 to 75.

The new rates are said to be benchmarked against the minimum pension for public sector
employees, which is currently at RM820 a month, so that the monthly retirement income does not
fall below the poverty level.

Following the revision, members need to have more in their Account 1 to be eligible for the EPF
Members Investment Scheme, under which savings are invested in unit trusts. Currently members
can use 20% of their balance in Account 1 to invest in approved unit trust schemes.

To illustrate the change, if a member is 40 years or older and has basic savings of RM80,000 in
Account 1 at present (2013), his excess will be RM36,000 (derived from RM80,000 - RM44,000).
He can then use only RM7,200 (20% of RM36,000) to invest in any approved unit trust. To further
protect EPF contributors, withdrawals for unit trust investments are only permitted once every 3
months.
With the new EPF rules in 2014, at RM80,000, the excess will only be RM11,000 (RM80,000 -
RM69,000). One can then only use RM2,200 (20% of RM11,000) to invest in any approved unit
trust.

An official from the Federation of Investment Managers (FIMM) who spoke on the condition of
anonymity said that the unit trust industry would be severely affected by the new ruling.

The RM326 billion unit trust industry comprises some 50,000 consultants who earn commissions
ranging from 1% to 3% from unit trust investments. The new ruling would also result in many EPF
members, who were previously eligible to invest in unit trusts, no longer being qualified.

One of the leading Unit Trust Management Companies, Public Mutual (a subsidiary of Public
Bank), derived one-third of its non-interest income from its unit trust operation. In 2012, less than
10% of its net profit was from its unit trust business. - September 9, 2013.

Required:

Summarize this case and provide solution and recommendation for the above situation. What are
your recommendation for unit trust industry?