MEMORANDUM SUBMITTED TO YANG BERBAHAGIA TAN SRI ABDUL HALIM ALI, CHAIRMAN, EMPLOYEES PROVIDENT FUND (EPF) ON THE REVIEW OF THE EPF'S OBJECTIVES FOR THE NEW MILLENNIUM

INTRODUCTION

This Memorandum is being submitted by the Malaysian Trades Union Congress (MTUC), the national trade union centre of Malaysia, to the Chairman, Board of Directors of the Employees Provident Fund (EPF) with the view to drawing the Board's attention on a number of important issues involving the Fund's 10.3 million contributors, seventy percent of whom belong to the low and middle income groups. It is being submitted at a time when there is widespread public dissatisfaction over the low annual dividend rate of 4.25 percent for 2002 (the lowest in 40 years), the introduction of unwarranted withdrawal schemes which have led to abuse, substantial losses incurred by the EPF due to bad investment decisions and mismanagement of EPF subsidiaries, lack of transparency in EPF investment decisions, and a host of related matters which have generally resulted in a significant reduction in earnings on members' contributions.

The Fund incurred "paper losses" of around RM15 billion when certain borrowers, particularly public listed companies, offered their shares as collateral for loans obtained from the EPF. Some of the shares depreciated sharply in value, thus causing "paper losses" to the EPF. Another good case in point is the unhealthy financial state of Malaysia Building Society Berhad (MBSB), an EPF subsidiary, which incurred losses of around RM2 billion due to mismanagement. The EPF Investment Panel has also not taken adequate care and responsibility to protect workers' collective interests. The Panel has applied members' funds to help loss-making EPF subsidiaries and has also invested in companies that do not enjoy a reputation for good and prudent management.

MTUC'S CONCERNS

The MTUC General Council met on 21 April 2003 and expressed its unhappiness over the very low dividend rate for 2002. The Council unanimously decided that an official protest be lodged with the EPF, objecting to the extremely low dividend rate of 4.25 percent declared for 2002. The MTUC calls for an upward revision of the dividend rate from 4.25 percent to 5.0 percent. As it is, EPF dividends only offer marginal capital growth when they are set off against the Government's officially declared national inflation rate of 1.9 percent for 2002. The MTUC is worried that if this unhealthy trend of low dividends is allowed to continue unchallenged, then there is the imminent possibility of dividend rates in the future years taking a further dip, until they reach the barest minimum (2.5 percent) stated in Section 27 of the Employees Provident Fund Act, 1952 (Revised 1991). The retirement aspirations of our low and middle income workers are at risk of being dashed if annual dividends do not grow fast enough through compounding to cover inflation and the rapidly depreciating purchasing power of the ringgit, leaving behind decent disposable retirement income for our workers during their twilight years. Our vision of creating an egalitarian civil society which has successfully achieved the "work-life balance" is also equally, if not more, at risk.

EPF'S OBJECTIVES AND SOCIAL ROLE

The mission statement of EPF is "Savings for your Old Age (Simpanan Untuk Hari Tua Anda)". Never in the EPF's fifty-year history since its inception in 1952 has the successful achievement of the Fund's mission statement become so pivotal, if not critical, as it has now. Seventy percent of the Fund's 10.3 million contributors (of whom 5,102,329, or approximately half, are active contributors) belong to the low and middle income groups and only have retirement savings between RM30,000 and RM100,000 in their accounts when they retire from active employment. Many have to support large families and dependants. Being mostly private sector employees, they do not enjoy value-added benefits such as job security, life-time pension, free medical care and hospitalisation and low-interest housing loans that are enjoyed by the country's 950,000 civil servants, their spouses and dependants.

The Government plans for the retirement of civil servants by contributing 17.5 percent of their monthly salaries to the Consolidated Pension Fund during their entire serving lives in an atmosphere of job security and predictability. Civil servants also enjoy periodic increases in wages and pensions to cover inflationary pressures. However, private sector employees have to plan their own retirement in an atmosphere of job uncertainty and economic unpredictability, at wages that are wholly subjected to the influence of market forces. A good case in point is the recent agreement reached between the Malayan Agricultural Producers Association (MAPA) and the National Union of Plantation Workers (NUPW), wherein the country's 50,000 rubber plantation workers have been offered a basic monthly wage of RM350.00 - a sum which is significantly lower than the National Poverty Line Income (NPLI) of RM510, RM685 and RM584 for Peninsular Malaysia, Sabah and Sarawak, respectively. In like-minded manner, hotel and restaurant workers receive very low basic wages and have to depend on service charges (shared on a dividing basis) to meet their livelihood needs. Security guards are in no better position either. Many are known to receive basic wages ranging between RM190 and RM260, and have to work very long hours, often seven days a week, to earn their upkeep through overtime pay. This is why the MTUC has been striving for a national minimum wage of RM900 a month, as we are well aware that when wages are wholly subjected to the vicious cycle of market forces, they can inflict irreparable harm to the wellbeing of workers and their families, and also result in the economic deprivation of the most vulnerable sectors of civil society. The EPF is the one and only nest egg of private sector workers when they retire from employment. The EPF has a moral obligation to ensure that its contributors are not socially marginalised, or subjected to economic victimisation during their twilight years, after having worked hard for the best part of their lives to support themselves and their families. It has to play a pivotal role in the creation of a caring society, which is an important constituent of Vision 2020.

PROPOSALS AND RECOMMENDATIONS

The MTUC wishes to put forward the following proposals and recommendations for consideration by the EPF Board with the view to increasing the retirement savings of its contributors and to also achieve the Fund's objectives:

1. Amend Section 27 of the EPF Act on Minimum Dividend Rate

Section 27 of the EPF Act on the Minimum Dividend Rate should be amended to read as "Five Percent". The Minimum Dividend Rate, which was fixed when the Act was signed into law in 1952, is completely out of date, is totally irrelevant to the present economic conditions of the country and does not reflect well on the EPF's objective as an old age savings institution. A minimum dividend rate of 5.0 percent is necessary to set off inflation and to leave behind a decent sum as disposable income for workers when they retire from employment.

The Government should also guarantee that contributors, particularly workers earning less than RM1,500 a month, continue receiving the residual proposed Minimum Dividend Rate of 5.0 percent in perpetuity, irrespective of national economic conditions, by "topping up" any income shortfall in such contributors' accounts with Government funds.

2. Increase Contribution Rates of Employers and Workers

The current contribution rates (12 percent - employers, 11 percent - workers) should be increased to 17.5 percent and 13 percent for employers and workers, respectively. The suggested employers' share of 17.5 percent is consistent with the Government's share of contributions every month to the Consolidated Pension Fund for its employees during their serving lives after they have been absorbed into the pensionable establishment. Higher contribution rates are necessary to cover the rapidly diminishing purchasing power parity (PPP) of the ringgit and to also effectively sustain the continued well-being of Malaysian workers in the light of longer life expectancy. Prevailing life expectancy levels are 70.2 years and 75 years for men and women, respectively. There has been a forty percent increase in life expectancy levels of Malaysians since the country gained independence in 1957.

Firm and quick enforcement proceedings should be instituted against employers who have failed to remit theirs as well as their workers' portions of contributions to the Fund. The methods and procedures currently in force are most unsatisfactory.

3. Provide Higher Margins of Withdrawals for Housing

The Fund should allow contributors to withdraw 50 percent (currently 30 percent) of their total contributions (held separately under Account Two) to purchase a house. This would help reduce their house mortgage liabilities, which many workers have been known to be paying even after retirement.

4. Withdrawals of One-Third Contributions Should be Restricted to

Special Circumstances

Section 54 (3)(a) of the Act permits contributors' withdrawal of one-third of their contributions upon their reaching 50 years of age. This should be appropriately amended wherein withdrawals are restricted to special circumstances such as:

- The contributor being rendered unemployed or retrenched at the age of

fifty;

- The contributor being rendered physically or mentally disabled wishing to

continue working;

- The contributor wishing to invest in Government-managed trust funds

such as Amanah Saham Nasional (ASN).

The contributor's share or investment certificates should be kept in trust by the EPF, and can only be encashed on the date of maturity of the investment portfolio. These conditional withdrawals would enable the affected workers to tide over pressing financial difficulties and to also start small businesses to sustain themselves and their families.

By restricting the one-third withdrawal to these special circumstances, the Fund would be assisting other contributors to retain higher savings in their accounts at the point of retirement.

5. There should be no Cut-Off Point or Age Limit for Withdrawals

Current provisions of Section 54 of the Act should be maintained so that there is no cut-off point or age limit at which all contributions have to be withdrawn. There should also be appropriate provisions to allow contributors to continue with their contributions to the Fund even after they have withdrawn all their savings, particularly those who continue working after retirement. By allowing contributors to keep their savings in their accounts for longer periods of time, the Fund would be able to ensure that their old-age retirement needs are better taken care of. Savings would be available when the person has no gainful employment.

6. Allow Contributors to Make Periodic Withdrawals Over Longer

Periods of Time

Section 55 of the Act should be appropriately amended to facilitate the following withdrawal options:

- Allow contributors to withdraw their dividends on a periodic basis but

retain the principal sum in their accounts which will continue to earn

dividends;

- Allow contributors to withdraw their principal sum on a periodic basis

while the balance remaining in their accounts continues to earn

dividends.

7. Costs of Medical Treatment and Care should be Government's

Responsibility

The Fund should scrap Account 3 (Medical) and transfer all retained contributions to Account 1 (Retirement). The costs of medical treatment and care should be fully underwritten by the Government, and contributors should not be expected to finance their own medical treatment and care especially after retirement.

8. Death and Incapacitation Benefits should be Restored at the Old

Rate

The Fund should restore payment of Death and Incapacitation Benefits at the old rate of RM1,000 to RM30,000 as it would give contributors and their dependants better financial security in the event of death or total physical disability.

9. Reconstitute Composition of the EPF Board

At the moment the EPF Board is composed of 1 Chairman, 5 Government representatives, 5 Employers' representatives, 5 Workers' representatives and 2 Independent members.

Section 4 of the Act should be suitably amended to ensure the following:

- 10 members should be workers' representatives;

- 4 members should be employers' representatives; and

- 4 members should be Government representatives, and this includes the

Chairman.

We see no purpose or need for having independent Directors on the Board as they have no interest or stake in the Fund. The suggested higher percentage of workers' representatives is to effectively reflect the basic objective of the Fund, that is, to function as a trust agency that has been entrusted with the responsibility to take care of the old-age retirement needs of workers in the country.

10. Investment Panel should include Workers' Representatives and

Report to the Board

Section 18 of the Act should be amended to accommodate the following:

- The Investment Panel should include workers' representatives nominated

by organisations that are "most representative" of workers;

- The Investment Panel should report to the Board, and not to the Minister

as is the practice now.

The basis for this proposal rises from the fact that the "investments of the Fund" duly stated in Section 18 of the Act are contributions received by the Fund which include deductions from workers' wages. Therefore the Panel should, in all fairness, include workers' representatives and report to the Board and not to the Minister.

11. EPF should be accorded Preferential Institution Status

The Fund should be accorded Preferential Institution status as more than 70 percent of its members are low and middle income workers. By being granted Preferential Institution status, the Fund will be able to have preferential access to special share allocations for institutional investors whenever local listed companies call for rights issues. This will enable the Fund to enjoy equal-standing opportunities and similar status with Amanah Saham Nasional (ASN), Amanah Saham Bumiputra (ASB), Lembaga Urusan Tabung Haji and Permodalan Nasional Berhad (PNB), to name a few. Revenue earned through such special share allocations will result in higher dividends for millions of ordinary workers.

12. Scrap all Unnecessary Withdrawal Schemes and Stop Introducing

any more New Schmes

All of us are only too well aware of the "frivolous" schemes that the Fund introduced over the past few years, which resulted in blatant abuse. The following need special mention:

- EPF Computer Purchase Scheme; and

- EPF Annuity Scheme.

These frivolous schemes have not only eroded member's savings but have also enriched certain vested interests. The Fund should stop forthwith all unnecessary withdrawal schemes as these will greatly erode the financial strength of contributors during their retirement years.

SUBMISSION

The EPF's social and moral obligations to the workers, particularly the low and middle income groups, are many. Pivotal to these is the guarantee that the Fund will hold its contributors' long-term interests in high esteem by ensuring that it practices prudent management of its funds in an atmosphere of transparency, accountability and social responsibility.

Senator Zainal Rampak G. Rajasekaran

President Secretary General

Date: Wednesday, 21 May 2003