DAP calls on all political parties, trade unions, NGOs, consumer groups and concerned Malaysians  to join forces to launch a  nation-wide campaign to mobilize  public opinion to demand change in  EPF law and governance  to protect the  RM203 billion life savings of 10.3 million EPF contributors by ensuring   greater EPF efficiency,   accountability and  transparency  of investment polices and   performance

 DAP forum  on “Lowest dividend in 40 years - what is the future of EPF"
by Lim Kit Siang

(Kuala Lumpur,  Monday): The shock of the lowest Employees Provident Fund (EPF) dividend in 40 years last year at 4.25 per cent, and the nightmare  of even lower dividends in the ensuing  years until scraping the statutory minimum of 2.5 per cent should be a wake-up  call to the 10.3 million EPF contributors to demand  a proper and rightful say in the security and quality of the RM203 billion EPF monies which constitute their life  savings for their retirement. 

The EPF Chairman Tan Sri Halim Ali said the 4.25 per cent last year was a reflection of the difficult investment of a low interest rate regime for the last four years as well as a lackluster stock market.  Acting Prime Minister, Datuk Seri Abdullah Ahmad Badawi said the dividend  last year was “the best that can be given under the circumstances”. 

The Star’s V.K. Chin in his “Comment” last Thursday (24.4.03) even advanced the subversive theory  that EPF only owes the duty to ensure that workers can retire at 55  with what they had remitted to EPF  over their working lives, and any dividend or interest is a bonus. 

This  forum tonight  rejects all these contentions and insists that the EPF and the government owe the EPF contributors full accountability as to why EPF could not give a dividend of more than 5% declared for 2001 when the country had registered a higher economic growth of 4.2 per cent last year as compared to 0.4 per cent for 2001, and whether it is not true that the dividend for last year could be 5.43 per cent  if the EPF did not have to set aside RM2.14 billion for “paper losses” in equity last year  and this amount had been used for the declaration of dividend. 

EPF contributors have been asking these two questions for the past ten days, but the EPF does not seem to have  heard or is bothered to answer them, although it claims to be a leader of corporate good governance and best practices in transparency, and a pioneer in shareholder activism in its  instrumental role to  establish the Minority Shareholders Watchdog Group.  EPF suffers from  blinkered eyes,  advocating shareholder activism while rejecting EPF contributor/stakeholder activism!

It is most regrettable that the EPF Chairman, Tan Sri Halim Ali is not at this forum or sent the EPF Chief Executive Officer Azlan Zainol to represent him as the invitation to the forum  was sent to him last Tuesday, and my office confirmed with Halim’s office twice last week on  the receipt of the invitation.  This does not speak well for Halim or EPF’s commitment to accountability, transparency or good corporate governance when they don’t even  respect the most elementary  right to information  of the most important EPF stakeholders – the 10.3 million EPF contributors. 

It is also very regrettable that the Malaysian Trades Union Congress President, Senator Datuk Zainal Rampak, is not here  tonight to explain his absence  from the most important EPF Board meeting which decided on last year’s dividend, as his claim that he was busy attending the ILO  Governing Body meeting in Geneva was not good enough.  If Zainal cannot find time from the three-week meeting of the ILO Governing Body in March to attend a one-day meeting of the EPF Board on the EPF dividend, then he should resign from the EPF Board in favour of  another MTUC leader who could safeguard the interests of the 10.3 million EPF contributors in a more responsible, diligent and effective manner. 

Right from the outset, let me state that EPF will  forfeit all  right to talk about transparency, best practices and good governance when it is not prepared to comply with the most basic principles of good governance such as making public the full list of the equities for whose “paper losses” EPF had to make provision for  RM2.14 billion  last year, depressing the EPF dividend from  5.43 per cent dividend to  the lowest dividend in 40 years of 4.25 per cent. 

From 1998 to 2001, EPF had to make provision totaling RM2.95 billion for “paper losses” in equity and doubtful debts, i.e. RM435 million in 1998, RM618 million in 1999, RM754 million in 2000 and RM1,141 million 2001. Together with the RM2.14 billion provision for “paper losses” in equities last year, EPF had made an astronomical  total provision of at least RM5.09 billion in the five years from 1998 to 2002, which could have been used to declare higher dividends for the EPF contributors every year! 

MTUC Secretary-General G. Rajasekaran has just told us that EPF is  sitting on RM14 billion of “paper losses”,  with RM2 billion from EPF’s ill-advised and disastrous venture as a housing and land speculator in the mid-nineties  through the  Malaysia Building Society Berhad (MBSB) – which have to be written off in the next few years, resulting in even lower EPF dividends. 

One critic of EPF had euphemistically referred to the  “inappropriate” EPF  accounting and dividend payment  policies in the following manner: “EPF has or will have a tendency to sell its winners (to book the realized gains so that dividends can be declared) and keep its losers. This can in the long run lead to a deterioration in the quality of its investment portfolio”. 

EPF contributors must bestir themselves to demand the right to be informed as to what are the total billions of “paper losses” in equity and doubtful debts in the books of EPF, how they are to be written off and their effect on the EPF dividends in the coming years. 

Last week, I had asked why the annual operating costs of EPF had shot up 80 per cent from RM194 million in 1998 to RM350 million in 2001, when the EPF dividend had plunged by over 26 per cent from 6.8 per cent to 5 per cent for this period – and now to an even lower 4.25 per cent for last year. 

In failing to keep the administrative costs of EPF under check, EPF has failed one of its fundamental objectives to ensure reasonable returns for the EPF contributors.  Not that the ballooning administrative costs of EPF have resulted in greater efficiency, performance  or quality of service of EPF. 

The 2001 EPF  Report promised that EPF contributors would be able to check their account balance online from the EPF website latest by the end of last year, but as the CUEPACS President, Datuk S. Siva Subramaniam, who is also a EPF Board member, has admitted, there is no sign of any such online service in the second quarter of 2003.  The EPF is at least five years behind Singapore’s Central Provident Fund in this regard, as I had told  the last Parliament that CPF  had allowed contributors to check their account balances online and asked why EPF could not do the same. 

EPF had also failed to be forward-looking to protect the EPF contributors against longevity risks. Based on the projection for year 2020, the average life expectancy at age 55 of Malaysian men is 82 years and women 85 years. However, the savings profile of active EPF members showed that the average savings for an EPF member in 2001 is only RM77,272 – for male RM89,656 and female RM46,103. 

An EPF survey conducted in 1995 showed that almost 70 per cent of EPF members who withdrew their contributions on reaching 55 spent all their EPF savings within three years. 

With the increased life-span to 82 years for male and 85 years for  female, Malaysia is facing the grave social security problem of an aging population who will have no independent means of financial support for some 25 years of their evening years.  EPF prides itself as the “oldest national provident fund and one of the most successful in the world”, but what has it done to tackle and resolve this grave social security  problem? 

A long-time EPF insider who served for a decade on the EPF Investment Panel until 2001, Dr. R. Thillainathan, offered the sharp critique of the EPF in a recent World Bank conference that EPF’s performance as a retirement scheme is “not satisfactory”. 

He said:  “EPF’s retirement scheme has not adequately addressed a  contributor’s market or longevity risks.  There has also been a failure to run EPF on a portfolio basis and to restrict its exposure to portfolio risk.  In fact, there has been a tendency to take unnecessary business or credit risks. 

“There has also been a failure to run EPF in the best interest only of its members. 

“These failures have raised serious governance issues. 

“EPF’s management practices with regard to accounting, performance measurement and dividends declared depart from private sector best practices. 

“This had distorted the behaviour of EPF’s regulator and fiduciraries, caused a serious mismatch in the interests of its regulator, fiduciaries  and contributors and therefore led to EPF’s mal-governance.” 

Among Thillainathan’s criticisms are: 

EPF Investment Panel 

Members appointed and can be removed at the pleasure of the Finance Minister. No independent bodies, like Parliament or other expert committees, are consulted on the appointment.  Independence of a member of the EPF Investment Panel requires him to declare his interest and abstain from voting on any interested party transactions, but a member is not required to pre-clear his trades or to report on his investment activity 

Accountability and Liability 

Risk and returns are for the account of the contributors but they have little or no control on investment choices.  Contributors are in no position to discipline members of the Investment Panel against bad management because they have no powers.  Personal liability of an Investment Panel member is not well-established in law. 

Regulation & Supervision 

Ministry of Finance is regulator and supervisor of EPF. But it does not have requisite expertise to do this job especially given its many other equally important job functions.   Where regulator and regulated are both government bodies, as is the case with MOF and EPF, regulator has been less able or willing to go public with criticism of the regulated. 

EPF & Governance Issues 

Risk is borne by contributor but investment decision is exercised by EPF. Arrangement potentially explosive.  

Contributor vs Regulator 

To avoid conflict of interest between contributors and regulator, EPF has to be operated in the best interest only of contributors. Promoting “development” should not be a goal.  Conflict of interest between MOF  as regulator & government as EPF’s biggest borrower. 

And the following are some of Thillainathan’s proposals and conclusions: 

  • Good governance requires qualified and independent governors who can be held accountable and liable.
  • Weaknesses in regulatory, supervisory and accounting framework have made for weaknesses in governance framework of EPF.
  • Easier to reform accounting  and audit framework of EPF to ensure EPF’s performance measurement and report adheres to best practice.
  • Good accounting and disclosure will minimize distortion in behaviour of EPF’s fiduciaries.
  • If poor financial performance does not get properly reported because of weaknesses in the accounting and disclosure framework, then it will be more difficult to bring about changes in governance practices.
  • In any reform of governance practices priority should be given to reform of the accounting of a pension fund and the fund should be audited by an external auditor from private sector who can then be held liable for negligence or fraud.

The conclusion to be drawn by the 10.3 million EPF contributors and the Malaysian public is that something is very amiss with the EPF management, investment and governance, warranting a major revamp to safeguard the rights and interests of the EPF members.  What is at issue is not just the lowest dividend in 40 years for last year, but how best to protect the future of EPF.

For this reason, DAP calls on all political parties, trade unions, NGOs, consumer groups and concerned Malaysians  to join forces to launch a  nation-wide campaign to mobilize  public opinion to demand change in  EPF law and governance  to protect the  RM203 billion life savings of 10.3 million EPF contributors by ensuring   greater EPF efficiency,   accountability and  transparency  of investment polices and   performance.


* Lim Kit Siang, DAP National Chairman