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

QuickTake on EPF (end 2006)

EPF members
SIZE

- 11.36 million
- 27 million - USD 83.16 billion - USD 79.57 billion

Malaysian population EPFs assets 2006 Real GDP 2006

IMPACT

Economy/Society/Labour Markets /Savings and Consumption Level

PUBLIC SCRUTINY

Trustee/Ownership

Note: USD 1 = RM 3.49

EMPLOYEES PROVIDENT FUND

PRESENTATION ROADMAP Background Governance Investment Risk Management Challenges Way Forward Questions & Answers

EMPLOYEES PROVIDENT FUND

BACKGROUND Malaysia in Brief

Population (2005): Population Growth Rate: Ethnic Groups GDP (2006) : GDP Growth Rate: Percapita Income: Unemployment Rate (2006): Inflation Rate (2006): 26.75 Million 1.78% Malay 50.4%; Chinese 23.7%; Indigenous 11%; Indian 7.1%; Others 7.8% USD 308.8 Billion 5.5% USD 2,700.00 3.5% 3.8%

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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 Hardcore Poverty Rate: 5.7% 1.2%

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BACKGROUND Social Security System in Malaysia: Social Security Benefits

Benefit Retirement Organisation Public Service Pension Scheme Employees Provident Fund (EPF) Armed Force Provident Fund Social Security Organisation (SOCSO)

Employment Injury Invalidity Social Assistance Health Care Others

Social Welfare Department Ministry of Health Workmen Compensation Scheme 1952 Employment Act 1955

EMPLOYEES PROVIDENT FUND

BACKGROUND EPFs Vision, Mission and Values

Customer First Vision: To be a leading social security organization in the world and the best government agency in Malaysia Teamwork Mission: Provide retirement benefits to members; convenient system to employers; challenging working environment to employees and socio-economic development to the nation Continuous Improvement

Integrity

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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 members account to which interest or dividend is added annually.
Employees contributions

Employers contributions

Dividend

PreRetirement Withdrawals

= =

RETIREMENT SAVINGS

EMPLOYEES PROVIDENT FUND

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.

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BACKGROUND Membership Growth, No. of Active Members & Employer Growth

Year
2006 2005 2004

No. of Members (million)

11.36 11.05 10.71

No. of Active Members (million)

5.39 5.23 5.07

No. of Employers 409,911 394,359 372,741

2003
2000 1990

10.42
9.97 5.94

4.91
5.04 2.94

355226
318,218 174,289

1980
1970 1960 1952

3.76
1.96 1.14 0.52

2.82
1.57 1.03 0.50

109,658
58,000 15,874 11,918

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BACKGROUND Investment & Assets

Year 6/2007 2006 2005 285,451 253,968 13,299 12,773 Cumulative Investments (RM Million) Annual Gross Income (RM Million) Cumulative Assets (RM Million) 306,410 290,255 263,865

2004
2003 2000 1990 1980 1970 1960 1952

237,106
217,051 179,047 45,642 9,261 2,193 629 17

11,758
11,046 10,542 3,259 637 119 31 0

240,362
220,161 181,518 46,680 9,481 2,240 633 28

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BACKGROUND Contribution & Withdrawal (Annual)

(RM Million)
30,000 25,251 25,000 21,968 20,056 20,000 16,847 15,121 15,000 9,991 10,000 7,124 5,000 12,727 11,501 13,403 13,423 15,083 18,172 20,143 21,860 27,952

0 1999 2000 2001 2002 2003 2004 2005 2006

WITHDRAWAL

CONTRIBUTION

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BACKGROUND Coverage 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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BACKGROUND Contribution Rate

YEAR Jun 2004 - present Jun 2003 May 2004 Apr 2002 - May 2003 Apr 2001 - Mar 2002 Jan 1996 - Mar 2001 Jan 1993 - Dec 1995 Dec 1980 - Dec 1992 July 1975 - Nov 1980 Percentage

EMPLOYEE
11 9 11 9 11 10 9 6

EMPLOYER
12 12 12 12 12 12 11 7

TOTAL
23 21 23 21 23 22 20 13

1952

- Jun 1975

10

Self employed persons can elect to contribute between RM 50.00 and RM 5000.00 per month.

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BACKGROUND Structure of Members Account

Before 1 Jan 2007

From 1 Jan 2007

Account 1 (60% of savings)

Account 2 (30% of savings)

Account 3 (10% of savings)

Account 1 (70% of savings)

Account 2 (30% of savings)

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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. 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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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.

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BACKGROUND Benefit & 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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BACKGROUND Tax 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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GOVERNANCE Governance Structure

MINISTRY OF FINANCE

BOARD

INVESTMENT PANEL

MANAGEMENT

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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)

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GOVERNANCE Board 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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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.

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LEGAL DEPT.

GOVERNANCE Management Structure

OPERATION DIVISION

PROPERTY DEPT. PROCUREMENT DEPT. ENFORCEMENT DEPT. WITHDRAWAL DEPT.

SERVICES DIVISION

CONTRIBUTION DEPT. BRANCH NETWORK DEPT. OPERATION INVT DEPT.

CEO

INVESTMENT DIVISION

RESEARCH & SUPERVISION INVT DEPT. EQUITY INVT DEPT. IT DEPT.

Board Audit Committee Board Risk Committee

ORG. DEV DIVISION

FINANCE DEPT. STRATEGIC PLANNING DEPT.

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 Group Minority Shareholder Watchdog

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 COVERNANCE
STAKEHOLDERS COMMUNICATIONS

1. 2. 3. 4. 5.

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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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;

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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, bankers acceptances, money market papers, private debt securities, and promissory notes.
(d) To provide loans to Federal or State Government.

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INVESTMENT The Power of Board to Invest

2.

The Board with the approval of the Minister may invest the
Funds moneys: a) Deposited in any bank or financial institution established by or under written law;

b)
c) d) e)

Joint venture;
Privatization programme; provide loans to any company incorporated under the Companies Act 1965; Investment outside Malaysia

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INVESTMENT Growth of Asset from Year 1985 2006 (in Ringgit Malaysia)
350

300 265.2 250 222.2 200 186.9 163.8 150 132.4 98.72 100 72.67 53.22 50 24.55 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 31.19 41.23

290.3

RM (million)

2006

YEAR

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INVESTMENT Asset Allocation

Money Market Instruments 4% Loans & Bonds 9%

MGS & Equivalent 39.5%

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

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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

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INVESTMENT Governance

MINISTRY OF FINANCE

EPF BOARD

INVESTMENT PANEL 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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INVESTMENT Dividend Rates

YEAR 2006 2005 2004 2003 2002 2001 2000 1999 1998 NOMINAL DIVIDEND RATE 5.15 5.00 4.75 4.50 4.25 5.00 6.00 6.84 6.70 INFLATION RATE 3.60 3.00 1.40 1.20 1.80 1.40 1.60 3.00 5.30 REAL DIVIDEND RATE 1.55 2.00 3.35 3.30 2.45 3.60 4.40 3.84 1.40

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PRESENTATION ROADMAP Background Governance Investment Risk Management Challenges Way Forward Questions & Answers

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RISK MANAGEMENT Enterprise Risk Framework

Strategic Risk

Credit Risk

Market Risk

Investment Risk

Liquidity Risk

Operational Risk

Regulatory Risk

Reputation Risk

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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 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 MANAGEMENT Risk Management in the EPF Strengthening EPFs 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.

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Employees Provident Fund Assurance 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

Investment Risk Management Section

Operational Risk Management Section

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RISK MANAGEMENT Who manages risk?

Board of Directors Board Risk Management Committee Senior Management Executive Committee Audit and Compliance Risk Management Department Business Units Provides oversight Approve risk management policies. Evaluate management of risks. Big Picture analysis of risk trends. Manage and monitors risk Special Committee (MORC and MRC) to assist Senior Management monitors risk. Audit Provide independent assurance. Compliance Provides independent review. Assist in setting policies and standards that reflect the risk appetite of the organisation. Responsible for owning and managing risk. Set and implement policy consistent with enterpriselevel policy.

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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. 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. Responsible to ensure effectiveness of control. To report on control effectiveness to Risk owner. To ensure MAP is carried out as planned to mitigate risk. To report on MAP status to risk owner. Coordinator and risk advisor. Assist risk scorecard owner and other owners on risk management. Aware about risk and risk management. To highlight any new key risks to risk champion and/or risk scorecard owner.

Risk owner

Control owner Management Action Plan (MAP) owner Risk Champion Individual staff

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RISK MANAGEMENT Key Success Factors

1. 2. 3. 4. 5. 6. 7.

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

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ENSURING IMPLEMENTATION AND ACCOUNTABILITY

BALANCED SCORECARD- EPF CORPORATE STRATEGY MAP
Vision: To be a leading social security organisation in the world and the best government agency in Malaysia
CUSTOMER/STAKE HOLDER
Common Obj Shared Obj.

FINANCIAL

F1: Optimize Return

F2: Effective Cost Management

INTERNAL PROCESS

P1 :: Continuous Improvements and innovations

P2: Enhanced Customer/ Stakeholder Communication

P3 : Enhance Strategic Alliances P4 : Employer Compliance

P5 :Compliance To Risk Management Framework

LEARNING & GROWTH

L1 Internalisation of corporate culture Performance based Knowledge sharing Customer centric Continuous innovation

L2: Enhanced Human Capital

EMPLOYEES PROVIDENT FUND

DRIVERS

IPLANNED OUTCOMES

CS1:Maximise Value for Customer

CS2:Practice good Corporate Governance

CS3:Enhance Policy input on Malaysias Retirement Scheme

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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 3. Health-care benefits not available during retirement.

4.
5.

Member changing retirement needs.

Changing of family support system (members may not get financial assistance from family during retirements).

6.
7.

Increasing size of fund.

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 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. On-going benefit and service improvements. (Revamping of the EPF benefit scheme at administration) New EPF Scheme for new members. Multi-pillar approach

Incremental Innovation

Business Model Innovation New Venture Innovation

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PRESENTATION ROADMAP Background Governance Investment Risk Management Challenges Way Forward Questions & Answers

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vijay@epf.gov.my

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